A common question that I get asked every now and then is about the value somebody’s company has. People show me classic formulas, theoretical models, market multiples and historical deal values. This is all very good when you are in a market where capital and buyers are abundant.

For 99.9% of the startups in the world, this is not quite the case. So, what are the important points to observe when you begin thinking about selling your business? And how you can improve your chances of getting sold by a fair value that will cover your incorporation costs and will still compensate you for all the time and effort invested in the operation?

Price agreement is something very hard to achieve between an interested and qualified buyer and a seller. It will be more difficult to an extent when you have your documentation and track record less organized than if you have all of it nicely structured in your files.

Also, different visions about the near future and the long-term industry sector performance affect the perceived values for both parties, besides internal metrics and numbers and the two sides perspectives.

If you want to optimize your valuable time building up momentum and negotiating a fair deal, pay attention to these value drivers:

1. Accomplished and ambitious founders

Many buyers or investors see in the management and founder teams one of the key assets of any potential acquisition. If those teams are not ambitious and methodical, the probability any buyer will make you an offer will be low.

Would you consider buying a business or part of a company that would take 10 years to return your investment? Or would you rather buy a company that in 3 to 5 years will have repaid your investment?

2. Income Predictability

Here we are considering income quality and income visibility. Income quality has to do with how recurring and mitigated your income is. Example: if you have 2 clients generating 70% of your revenue in one company and 200 clients generating the same 70% income in a second company, the business with more income quality will be the second one.

Income visibility refers to the recurring contractual revenue that your company has. This usually attracts buyers as they know that the minute that they get the company, there is some guaranteed cashflow happening and this will certainly give your valuation a few multiples.

3. Barriers to entry

A barrier to entry will always protect your company from competition and from market oscillations. Contrary to popular belief, getting into a highly regulated market is good, as only few manage to insert their companies in those kinds of market – regulation working as a barrier to entry.

First mover or pioneer advantage is a too often underrated barrier to entry. Nobody can take from you the title of first in the market and usually this gives your brand a special place in the pantheon of options that a more mature market will offer its audience.

Long term contracts also play an important role as they give your startup more visible income, as well as a broader user base gives you a more qualified income.

4. Strategic synergies

Strategically speaking, when you sell your startup to another company that already has a distribution network that carries more capillarity than yours, you are willing to give away part of your control in the company in order to get accelerated sales and revenues.

This is also the case when different acquirers get in the operation in the same or in different moments, bringing each one advantage. Classical examples are distribution networks, infrastructure or platforms, cashflow and user/client base.

5. Avoid under-valuations – don’t sell it too early

It is always better to have your business model fully validated and with one to three years of repeatable operations before you sell your startup partially or entirely. The more you stay on the road successfully on your own – as long as you can and a strategic alliance would not accelerate your growth – the better your valuation will be when you prepare for sale.

6. Organize your track record files

All your files should be in order: accountancy, human resources, legal records, financial demonstrations, product development roadmaps, CRM systems and so on. This helps sustaining your side of the negotiation and must be the factual base for your convincing arguments after the main thematic discussions.

Proper acquisition preparation can help even on your daily routine and is never too much.

7. Manage possible post-acquisition expectations before you sell

What will be the responsibilities and expectations of each one in the acquired company? What are the operational roles that will suffer cuts or that will have the burdens increased? Will your team and employees remain all in the company or some may be going to the buyer company? What about your services and products portfolio: does it get shut off or does it continue with same brand and offer? Do your products get integrated in the buyer company portfolio?

What if the acquirer gets acquired? Do you have a compensation clause in your sale contract? You should pay attention to this, as it happens earlier and more often than we would have imagined 5 years ago.

8. More cash in the bank will help your valuation grow

One of the most frequent reasons that early-stage exits fail is the fact that traditional due diligence concentrates on the startup financials. Cash in the bank account, some reserves to burn in emergencies and low debt are basic points that may be demanded by your buyer and may make your valuation higher.

Obviously low debt history and good cash reserves demonstrate a startup that is healthy financially and which management is prudent. This will reflect on the multiple you can get over your annual turnover.

9. Exercise due diligence systematically

Last but not least, practice due diligence systematically in your company. This will give you a flavor of the current status and insights on points that must be stronger for a buyer to consider acquiring your business.

Make sure to clean up and correct mistakes that keep being repeated for one reason or another and never tolerate good enough practices, as buyers are always looking for best in their classes and not just another moderately good startup.

So you’ve heard of bookkeeping and accounting, but what is financial planning and analysis (FP&A), and why is it important?

This is the second article of a three-part article series on how to think about entrepreneurial finance. This article will provide you with the basics and principles of FP&A.

What is financial planning and analysis?

Simply put, FP&A is the process of determining how your company will afford to achieve its vision, strategic goals, and objectives. While accounting is about looking backwards, FP&A is about looking forward.

In the world of startups, you can tell just how important planning is by looking at some of the companies with no revenue and huge valuations – much of the company’s value comes from its projected future earnings. It’s safe to say that no matter the size of your company, you are going to need to engage in budgeting, forecasting, and analysis that supports major decisions of its executives.

Building the financial talent you need in a startup or small company is a gradual process. In a new venture, the FP&A function is often handled by the founders with outsourced assistance. As the company grows, the controller or CFO will often be in charge of FP&A. And as the company becomes larger, a full-time FP&A team will most likely be a valuable investment.

The increasing magnitude of financial complexity, employee count, revenue, and outside funding are the drivers of the evolution of the financial infrastructure in the startup. Generally speaking, with venture funding in hand, more than 30 employees, and/or generating solid revenues (€5-20 million), it’s time to think about formally instituting a FP&A department within your company.

FP&A will be an integral part of finance and accounting, whether in-house or outsourced. The FP&A manager will assist with the preparation of internal and external reports, materials for the board of directors, monthly financial analysis material and provide ad-hoc planning and analysis for the organization.

In a well structured company, the controller will manage financial accounting, and the FP&A person(s) will be in charge of management accounting (article coming soon).

The workflow of an FP&A manager includes:

• Creating systems and processes on a daily basis
• Short-term cash flow analysis and forecasts
• Routine analysis of internal controls
• Creating and analyzing financial models and simulations
• Anticipating scenarios about the company’s cash flow and financial projections
• Implementing monthly, quarterly, and annual growth strategies

Generally speaking, the FP&A manager will be in charge of the processes that support an organization’s business health and strategy, and ensure basic financial survival.

And make no mistake, while being very good with numbers, the FP&A function requires a surprising amount of communication skills. FP&A is also part of the professional approach used when searching for debt or equity capital, and when presenting your ventures to investors and lenders.

The modern finance function

The bad news about FP&A is that the work can be boring. The good news is that it’s quickly becoming more interesting. FP&A professionals are in essence storytellers. Using numbers as their language, they provide insights into the future by connecting the dots, thus unlocking value.

In other words, FP&A is about anticipation – making sure you get answers to questions that link planning and analysis to choices and strategic business decisions. FP&A answers strategic questions, ensures good accounting, analyzes product profitability, and of course, it’s used to determine how much money your venture needs, when is it needed, and how long will it last.

Any size company can benefit from engaging in FP&A activities, even if you have to outsource them at first. The “F” in FP&A speaks for itself; the finance function is just part of a broader company responsibility to plan, acquire, and manage capital to efficiently run the business.

Finance professionals can serve a wide variety of areas within an organization. Below, I’ll go over the process that financial planning (“P”) and analysis (“A”) encompasses, and highlight its key parts.

The “P” in FP&A

Accountants record the historical results, and then the FP&A professionals take this information and analyze it and explain the historical performance (the “A” in FP&A). Then they forecast future period results using the insights learned from the analysis (the “P” in FP&A).

The core of the FP&A role really lies in the ‘planning’ aspect of it, because it not only involves forecasting how the bottomline will change over time, but also includes contributing to a solution on how to close the financing gap.

The purpose of financial planning is to indicate the venture’s potential and to present a timetable for financial viability. The financial plan is basic to the evaluation of project, and it needs to represent your best estimates of financial requirements.

To make sure the value chain, the cash cycle and the other economic fundamentals make sense in terms of the business opportunity and overall company strategies, try to get answers to the following questions:

• What are your gross and operating margins?
• What is your profit potential?
• How durable is the stream of profits?
• What are the variables that go into determining pricing and produce profits?
• What are your fixed, variable and semi-variable costs?
• What assets are used and will be used in the business?
• How many months to break even given your proposed financing?
• How many months to reach positive cash flow?
• When will you run out of cash?
• Can you foresee any significant changes in cash flow as you grow?

Important note: always document all assumptions supporting the pro-forma (projected) numbers and financials, such as the assumptions made in timing of collections and receivables, terms of payments to vendors, planned salaries and wage increases, anticipated increases in any operating expenses, seasonality characteristics of the business, and so forth.

Also, in high-growth environments, organizational development is often a key factor, so don’t forget to include staff assumptions as well. More employees will bring about more complexity and the need for more financing.

Keep in mind that to estimate cash flow needs, always use cash-based rather than accrual-based accounting, that is, use real time cash analysis of expected receipts and disbursements.

And finally, you should update your capitalization table showing ownership and invested equity based on the external funding requirements needed to drive transformation and growth.

The “A” in FP&A

The analysis part of FP&A is about understanding the financials of your business, both quantitatively and qualitatively – sometimes finance is not about money. These are some of the basic questions you should be asking yourself and that financial analysis can help you answer:

• How long does it take to get a customer to buy your product?
• How much cash do you need to get to the next milestone?
• How much do we spend on marketing in order to generate the revenues we’re looking for?
• How long will it take to convert a prospect into a paying customer?

Here are the basic activities involved in financial analysis that you need to know:

Analysis standards. The analysis needs to cover three years, including current and prior year income statement and balance sheets, if applicable; and profit and loss forecasts for three years ahead, including pro forma income statements and balance sheets, and a break-even chart.

Cash flow analysis. During the start up years, usually the level of profits will not cover operating needs financially, and the cash inflows often do not match the actual cash outflows on short term basis. Detail the amount and timing of expected cash inflows and outflows. Determine the need for and timing for additional financing and indicate peak requirements for working capital.

Break even chart. A chart showing the level of sales and production that will cover all costs, including those costs that vary with production, highlighting opportunities to take advantage of scale costs and those that do not.

Specify assumptions. Along with the schedules, you must specify the assumptions behind such items as sales levels and growth, collections and payables periods, cash balances, or cost operations.

Sensitivity analysis. It’s also standard to perform a sensitivity analysis, such as for example what would be the effect of a 20% reduction in sales from those projected or 20% higher level of productivity costs, and which could prevent the venture’s sales and profit goals from being attained.

Also, describe how you will report costs and how often, who will be responsible for the control of the various cost-elements, and how you will take actions on budget overruns.

And finally, highlight the important conclusions, including but not limited to maximum amount and timing of cash required, the amount of debt and equity needed, and how fast any debt can be repaid.

10 of the best FP&A principles to keep in mind

1. A good plan. Easy to understand and simple to execute financial planning often determines whether a venture will succeed or fail – a good plan is a very powerful tool. (1) First define the core of the business opportunity and the strategy for seizing it, (2) then begin to examine financial requirements in terms of -assets needed and -operating needs, and (3) finally identify the details.

2. Business opportunity always leads and drives the business strategy, which in turn drives the financial requirements, the sources and deal structures, and the financial strategy.
3. Creativity plays a very important role in financial planning.  As an entrepreneur, you need to look creatively at your venture and consider alternative ways of launching and financing it.
4. FP&A is continuous cycle, and unless the company ceases to exist, the FP&A process never stops. The financial life cycle determines the capital available over time for different types of firms at different stages of development.
5. The financing strategy is ultimately determined by the available alternatives  –so the principle is obvious: ideally, raise money when you do not need it.
6. Cash is King, and cash-flow is Queen, referring to the immense importance of cash in the overall health of a startup or new business – cash is the lifeblood of a new venture. Lack of cash management is one of the most cited causes of company trouble.
7. Building a brain trust of the right mentors, advisors and coaches is one of the entrepreneur’s most valuable secret weapons, so reach out.
8. Use other people’s resources (OPR), it can be as simple as anyone or anything available that will help promote your project. Control of resources rather than ownership of resources is the key to a ‘less is more’ resource strategy. Bootstrapping is about relying on the minimum possible to proof that you can bring cash into the business.
9. Spreadsheets (a double-edged sword) are nothing more than pieces of accounting paper adapted for use with a computer. While computer-based analysis is a great resource, it’s also a source of problems for entrepreneurs who have the impulse to get carried away with schedules and calculations before applying facts based on an understanding of the business.
10. Analysis should be grounded in sound perceptions about an opportunity, if not, it’s almost always inaccurate. If the business opportunity is not well defined, ‘playing with the numbers’ is just that – playing.

The bottom line – performing FP&A is critical to the success of any business

Entrepreneurs in high-growth companies distinguish themselves with leading entrepreneurial practices in marketing, finance, management, and planning. But often in a new and emerging company, the finance function is nothing more than a bookkeeper or an outsourced accounting firm, and this leads to situations like lack of real cash management.

FP&A is a resource in itself, and it’s quickly becoming a source of competitive advantage for companies by increasing efficiencies in operations and use of capital, often leading to a huge potential boost – i.e.higher startup valuations and more access to talent. Good forecasting means good prediction of future outcomes and a better strategy-setting.

So, either founders learn the language of accounting & finance, or they have someone on the team who does. But generally speaking, founders will not get very far without a basic understanding of accounting (the language of business), FP&A (storytelling with numbers), and management accounting (the performance of operations).

A founder with a good understanding of the finance function will be in a much better position to drive their venture to success, no question about that.

I hope this article has been a helpful guide to understanding the role of financial planning and analysis at a startup company, and at any new business for that matter, and how the FP&A function plays a major role in supporting decisions made by a company’s CEO, CFO, and executive team.