Franne McNeal explains why cash flow matters to a buyer. When acquiring a business, a buyer writes two checks: one to the seller and one for working capital. Owners can boost valuation by collecting receivables faster and extending payables slightly.
Hi, I'm Franne McNeal, and there are 8 key drivers that drive the scalability of a company. The 4th one is the seesaw concept. Remember when you were a kid and you'd go to the playground and there'd be a seesaw? There was a light kid and a heavier kid, and when the heavier kid gets on, the light kid goes up. The same kind of relationship exists between the way cash moves through your company and its value. And it's one of the drivers of scalability. Essentially, when a buyer comes in and buys your business, they've got to write 2 checks. They write a check to you, the owner— that's obvious— and the second check is the one a lot of people really don't think about. The second check is to fund your company's working capital. That's the money your business needs to operate the day you hand over the keys to the buyer. The deal is that the buyer must write those 2 checks out of the same checkbook. So the more your company sucks up in the way of cash and the more cash your company needs to operate, the less the buyer is going to be willing to buy your business. So the way to improve your score on the valuation seesaw is to really make sure your business is generating cash. You know, if you collect receivables, And collect them faster, and if you extend your payables just a little bit more, you basically can get to the point where you're generating more cash as the business, and that goes a long way to prove that you're on the seesaw to success.
