Over the past few months, we’ve worked with dozens of searchers and operators to help them acquire small businesses. As part of any acquisition, there will come a time when forecasts need to be provided to a lender or investors.

While some folks come from a finance background and will go as far as complex bottoms-up revenue builds, others come from the trades and Excel is not their strength. For those without a strong financial background, the shortcut we often see is to take last year’s numbers, slap a double-digit growth rate on it, and call it a day.

While some less savvy SBA lenders may let this fly, it's penny-wise and pound-foolish in our opinion.

Building forecasts for an acquisition is as much an opportunity for the searcher or operator to build a realistic plan for the future as it is an exercise for securing financing. A solid forecast will allow you to:

Understand how the business operates: What drives revenue? What is the amount of working capital the business needs? How much needs to be reinvested in equipment year-to-year to maintain current operations?
Fully load the transition costs: How much does retaining the previous owners impact cashflow? Are there ongoing consulting services? What expenses can be cancelled on day one?
Build a plan for growth: What is a reasonable growth rate? Is it based on the expected industry CAGR? Or the business's historical rate? What does that growth cost in terms of investing in new equipment, another location, or additional crews?

In our opinion, the best forecasts account for pessimistic (“bear”), neutral (“base”) and optimistic (“bull”) cases of the future. How these cases relate to the historic growth rate or industry growth rate really depends on the business.

For instance, if the business is relatively small and grew 30% YoY the past few years, it's probably unrealistic to expect that to continue. Maintaining that growth rate would really be an optimistic outcome.

Additionally, understanding how growth relates to your costs can help you plan for when to invest in expansion. Growing 10% next year may mean that you really need to buy another 3 trucks and hire a fourth crew, an investment of ~$250K or more. You may want to wait to get your feet under you before depleting any cash you have on hand on growth. On the other hand, you may be able to grow another 10% before you need to add another crew.

So, while forecasting growth may not be the most fun thing to spend time on, it can really make the difference post-close. It will give you clarity on how the business works, how much growth costs, and how much wiggle room you have to take some punches during the transition.

404

This page could not be found.