Let’s face it. Preparing a monthly budget and a multi-year projection is hard. It can take several years to determine the best way to prepare them. If the business owner has not historically prepared a budget or a multi-year projection, learning to do this several years prior to a sale process will be very constructive. Specifically, it will enable the business owner to learn how to prepare these management tools before they will be scrutinized by buyers. In addition, preparing a multi-year projection provides insight into the business owner’s view of and is indicative of the business owner’s financial goals for the near future.

Whether or not the business owner prepares a formal budget and a multi-year projection, the business owner has an instinctual expectation for the succeeding year and the near future. The preparation of a budget and multi-year projection formalizes these expectations.
A budget and multi-year projection are extremely useful in a sale process, but in different ways. Let’s start with budgets. A sale process typically takes six to twelve months. During the process, the business owner advises buyers that the company’s current year budgeted revenue and EBITDA are $X and $Y, respectively. Some obvious questions that buyers will then ask include:

  1. How is the company tracking to its budget?
  2. Are the results ahead of plan (behind plan) due to higher (lower) revenue, a higher (lower) gross margin, lower (higher) expenses, or some combination?
  3. Based on year-to-date results, is the budget achievable?
  4. What results does the company need to achieve during the remainder of the year to achieve the budget?
  5. Are the results proportionate during the year or is there seasonality that would cause certain months to be stronger or weaker?
  6. Are there products and/or services that are stronger/weaker during certain months of the year?

The budgeting process also provides buyers with insight into how the business owner thinks about monthly cash flows. For example, does the company make monthly accruals for large periodic expenses or expense these items as incurred? Instances include annual employee bonuses that are based on year-end results or real estate taxes that are typically paid twice per year. Monthly budgets will reveal how the company addresses this type of expense.

Preparing a monthly balance sheet budget is highly informative as well. The balance sheet demonstrates to buyers the monthly cash sources/uses related to items such as building inventory in anticipation of a busier season, increasing accounts payable due to extended trade terms, or increasing fixed assets due to maintenance and/or growth capital expenditures.
Committing the business owner’s knowledge of the company to a thorough, detailed budget addresses numerous questions and increases credibility with buyers.

As noted above, multi-year projections are instructive since they provide insight into the business owner’s view of and plans for the future. Business owners often say “I can barely predict next month. How can I project two to three years into the future?”
The question is a legitimate concern. With that said though, the process of preparing a multi-year projection is as instructive as the outcome. The multi-year projection can address some of the following questions:

  1. Has the business owner made or does the business owner plan to make investments that are expected to increase revenue?
  2. Are there new products under development that are expected to generate revenue in the near future and what is the revenue trajectory for these products?
  3. Is the company investing in a new marketing strategy that is intended to increase market share?
  4. Is the business owner planning to invest in equipment that will increase revenue or lower costs?
  5. Will the company need to increase administrative employees to support growth?

How the business owner addresses these questions provides considerable insight into the future.

Once the business owner has invested in the process of creating an annual budget and a rolling multi-year projection, preparing the budget and multi-year projection the next year should be easier – at least many of the topics that need to be considered should be similar. Preparing a multi-year projection as a management tool and updating it annually increases the credibility of the projection with buyers since it was prepared in the ordinary course and not prepared solely in connection with the sale process.

In closing, let’s not forget that buyers are purchasing expected future earnings and cash flow. The ability to present a credible and convincing budget and multi-year projection creates confidence that the company will achieve the projected earnings and cash flow which will support the desired sale valuation.