Building Good Financial Projections for Potential Buyers

Mergers and acquisitions involve a lot of delicate challenges. One of the trickiest parts of selling your business is providing plausible financial projections to a potential buyer. Most buyers will value your business based on expected future performance. People can debate the likelihood of future outcomes all day long, but solid projections will limit the scope of that debate and benefit you tremendously during the process.

Here are some ideas to consider:

  • Because the future is uncertain, there is no “right” or “wrong” when it comes to financial projections. There are only more or less realistic assumptions behind the forecast. A credible forecast should be informed by both the company’s historical performance and the changing dynamics of the business. Industry metrics for revenue growth, operating margins, and expenses can be helpful to frame reasonable expectations about the future.  These metrics and statistics might be available in publications related to your industry or in various public or private databases. Your accountant may have access to some of these statistics if you do not. M&A advisors typically have many resources they can refer to as well.
 
  • You should be able to clearly explain the assumptions and provide documentation to support them. It’s easy to slap a growth rate onto top line revenue and calculate profit based on typical margins, but this doesn’t lend itself to building the strongest case. For one of our recent projects (a versatile manufactory serving multiple industries), projections were based on a variety of factors. Among these were recent capital expenditure to increase production capacity for several divisions and bring some other services in-house (replacing third-party services and increasing margins). Being able to walk a buyer through this reasoning is actually more important than the projections themselves. A buyer might disagree with the concrete projections you create, but strong arguments behind the assumptions help the buyer understand the financial opportunity and the means to actually achieve it. This can helps the buyer build their own forecast models that might be even more favorable than yours. 
 
  • Of course you want to avoid being overly optimistic, but at the same time you don’t want to be too conservative either. Over-the-top projections that are nearly impossible to meet might attract early interest, but failing to justify them during the M&A process can damage your credibility and lead to re-negotiations or deals that just drop dead. Excessively conservative forecasts can also be unhelpful. Sometimes management budgets are used in forecasting (nice and simple because they’ve usually been created already), but these are often more conservative than projections for M&A purposes and buyers may fail to see the future opportunity. You want your vision of the company’s future to be plausible but also exciting and evocative for the buyer. 

 

See below for some other resources you may enjoy:

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Become a Better Public Speaker
Many business owners would like to improve their public speaking skills. Sometimes we provide coaching to clients so they can participate in more effective presentations to prospective buyers.

TED Talks showcase various masters of public speaking. The content isn’t always great, but the speakers themselves usually are. Two of the most impressive speakers have been Sir Kenneth Robinson and the late Hans Rosling.

Robinson
Rosling

Robinson is a master of integrating humor and insight. Rosling is a master at using graphics. 

Watching talks like these will show you many great qualities to emulate and merge with your own style.

If you can, practice a speech in front of a camera before you get in front of a crowd. Being able to watch yourself will reveal weaknesses in your style so they can be identified and corrected.  
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The Magic of Seeing a Face
Calgary’s mandatory mask bylaw comes into effect on August 1. One of the unfortunate social consequences of the pandemic and mask wearing is that it prevents people from seeing the full faces of others. The following article talks about the science behind why seeing a face is so important to our social lives. Anyone who values face-to-face negotiation may find this particularly interesting. 

https://www.scientificamerican.com/article/the-face-is-an-entryway-to-the-self/ 

 

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