What Are The Nuts And Bolts Into Pricing Your Business
They’re in the pro forma you’re about to create.
What’s a pro forma?
According to Forbes, “Pro forma first came in vogue in the merger-mad 1980s, as it was used to help investors see what the new combination would have looked like financially had it been a single entity for the previous year or so.” Investopedia.com perhaps explains the term better, as “a Latin term meaning ‘for the sake of form.’ In the investing world, it describes a method of calculating financial results in order to emphasize either current or projected figures.”
Why do you need a pro forma?
A pro forma lets prospective buyers know the potential value and risks associated with buying your pawn business. It also puts you in a better position to sell, and helps you find the right buyer at the right time.
How do you create a pro forma for your pawn business?
You make certain that you have accurate financial data. That data might include income statements, balance sheets, and point-of-sale reports from your pawn operating system. You will also want to make sure that you have accurate monthly or quarterly date-runs per store for the previous two to three years.
Your business’s revenue should also be included in your pro forma. If, for some reason, you’re unable to include it in your pro forma, your revenue will still need to be documented at some point, and presented to the buyer. Gathering this data can be arduous, and ascertaining forecasting information can be even more difficult, but both the gathering of your revenue information and forecasting the potential value of your pawn business will be necessary in order to get the most out of the sale of your shop or shops.
Your ultimate goal is to assess your business accurately from a financial perspective in order to determine the right sell price. All too often, sellers attempt to value their pawn business based solely on what their retirement needs are. No one truly knows the correct marketable value until an accurate proforma has been created.
Buyers approach acquisitions as investments. They expect a pro forma, and expect your historical data to be organized. In other words, they expect you to have your ducks in a row. You want your ducks in a row, too; without a pro forma, the chances that you’ll get an offer from a buyer that truly reflects what your business is worth are extremely unlikely.
In your pro forma, you should display your historical performance in an income statement-like format that includes key ratios and percentages, i.e., yield on loans, default rate, gross profit margin and operating expense to net revenue ratio. Forecasted revenues should be for the next two to five years.
Big tip: Use comparative financial data from stores in the area or a similar buyer’s store data.
You can bet your bottom dollar that your prospective buyer will build their own pro forma based on stores similar to yours in order to analyze your business’s target-worthiness. If you provide them with the information yourself—or at least know what they know—you’ll be ahead of the game when it comes to negotiations. With the right pro forma, negotiations can become less like negotiations and more like a straight deal, which is precisely what you want. Comparative data is key. Don’t underestimate its value.
Are your operating expenses “normalized?”
In your pro forma, it’s important that you indicate which expenses are non-recurring, owner-related expenses. You’ll want to point out owner draws, owner vehicles, travel associated with ownership, benefits, etc.
For you, the seller, the most important reasons for developing a pro forma are: 1) to achieve a solid understanding of the future cash flow potential of your business, and 2) to gain the ability to illustrate that understanding to the buyer.
Keep in mind that the buyer is looking for a specific return on invested capital for each acquisition investment. There are additional methods of analyses potential buyers will employ, such as internal rate of return, that will also help them determine if the opportunity to purchase your business is worth their while.
A proper pro forma can be difficult to create, but if you want to get the most out of the sale of your pawn business, you’ve got to create it.
Do the legwork. Do the research. You could save—and gain—a lot of money.