Why is it said that cash is king when it comes to selling a business? And what exactly does that mean? In the context of selling a business, the phrase “cash is king” highlights the importance of cash flow and liquidity in deciding the worth and appeal of the company to potential buyers.
Here are a few of the main reasons why cash is king when it comes to selling a business:
1. Exhibits Stability and Sustainability
Cash flow is an important sign of a company’s financial health and capacity to generate regular revenue. Buyers go for organizations with excellent cash flow because it indicates stability, sustainability, and the possibility of a consistent return on investment.
2. Ensures risk reduction
Cash reserves act as a buffer against obstacles and uncertainties that may occur during the transition period following the sale. Furthermore, having cash on hand enables the new owner to manage any unforeseen expenses or bridge any revenue shortfalls.
3. Encourages expansion and growth
A company with a strong cash position is better positioned to capitalize on growth prospects. As a result, purchasers frequently seek out companies that generate excess cash, which they can reinvest to fuel expansion, fund innovation, or pursue strategic objectives.
4. Aids in financing
Buyers may need outside finance to purchase a business, and lenders prioritize cash flow when reviewing loan applications. As a result, a company with consistent cash flow is more likely to obtain favorable financing terms, making it easier for potential purchasers to complete the acquisition.
5. Increases the value
Businesses with consistent and robust cash flow are often more valuable than those with irregular or volatile earnings. Cash flow is an important aspect in evaluating a company’s market value, and buyers are willing to pay a premium for companies that have a demonstrated track record of generating solid cash flows.
Selling a business – Cash Flow Improvement Suggestions
The expression “cash is king” emphasizes the importance of cash flow in the sales process. Bottom line: purchasers want companies with excellent cash flow. So, how do you make cash king while still increasing the worth of your company? Here are a few pointers to get you started:
1. Change Your Mindset
Rather than running your firm to make a livelihood, run it to demonstrate profitability. It may appear to be a minor distinction, yet it is critical. Pay attention to the bottom line and try to increase it as much as feasible. While running and growing your business, prioritize areas that will have the greatest positive impact on the bottom line.
2. Process Your Salary Via Payroll
The compensation of the owner (paid through payroll) is a discretionary cash flow expense and one of the simplest ways to increase cash flow. There are others, but this is the simplest with the most impact, so take advantage of it. Consult your CPA for more information.
3. Plan ahead of time
Remember to evaluate how much cash you’ll get to keep as well as how much money you can sell your firm for. We’re dealing about taxes here, and being prepared makes all the difference. Begin discussions with your CPA and advisory team early on about how to minimize the tax effects of your business sale, and don’t forget to include your will and estate planning in the mix.
4. Consult with a Professional Business Advisor
Experienced business consultants, such as those at CasinosBroker, have decades of knowledge and can help you avoid typical pitfalls and provide effective advice on increasing the value of your company. We’re in it for the long haul and will walk you through the sales and transition process when the time comes to sell.
We can assist you if you are considering selling your business. Contact us today for a free, no-obligation company valuation.