7 minute read

Why Liquidity and Solvency Matter When Selling Your Business

Buyers want cash flow right away. That's one reason buy an existing business vs. starting a new business—to skip the slow startup phase.

Strong numbers speak for themselves. A company with financial stability sells faster and often for more money. Liquidity and solvency are both important factors that give you financial leverage. Buyers want to see a business that runs smoothly, handles pressure, and manages its debt well. Good liquidity and solvency ratios make it more likely that your deal will close without delays or second thoughts.

What Is Liquidity?

Liquidity shows how well your business can cover its short-term bills. Simply put: can your business pay what it owes right now, without delay?

Buyers want to see strong liquidity ratios because it means fewer surprises after the sale. It signals that the business runs smoothly and can handle day-to-day costs without needing outside help or accruing long-term debt.

They often look at:

• Cash on hand. Money available immediately in bank accounts and liquid assets.
• Current ratio. Current assets ÷ current liabilities (A healthy ratio factoring in total liabilities is usually 1.5 to 2)
• Quick ratio. (Cash + Accounts Receivable + Marketable Securities) ÷ Current liabilities (A strong quick ratio is 1 or higher)

These numbers help buyers understand a company's ability to stay afloat in the short term. Strong liquidity builds confidence and speeds up the sale process.

What Is Solvency?

A solvent business has enough capital for current operations and to grow over time. Can it handle its debt and still keep going?

Buyers look at solvency to judge long-term stability. A business with too many long-term obligations or weak earnings can be a risk. Strong solvency means the company can scale without constant financial strain.

These are the key financial ratios:

• Debt-to-equity ratio. Total debt ÷ Owner's equity or shareholder equity (Lower is better; under 2 is often a good financial position)
• Interest coverage ratio. Earnings before interest and taxes ÷ Interest expense (A ratio of 3 or higher shows good breathing room)
• Total debt vs. the company's assets. The debt-to-assets ratio shows how much of your business is owned vs. owed.

Buyers are more confident when there's low risk. Strong solvency also improves financing options, since lenders prefer stable businesses.

How Liquidity and Solvency Impact the Sale

Liquidity and solvency shape perceptions of a company's financial health. Strong liquidity can speed up deals. Buyers trust businesses that have enough cash to cover their financial obligations, and that makes the transition smoother.

On the other hand, poor solvency can scare off even serious buyers. Concerning debt obligations or weak earnings signal risk. If profitability is in question, it can shrink your buyer pool or stall negotiations. Buyers may lower their offer or walk away entirely if your business is insolvent.

Both liquidity and solvency affect your asking price and negotiation power. A financially stable business can demand more and hold firm during negotiations. One that's struggling often gets pressured to drop the price.

In asset sales—common on platforms like BuyBizSell—liquidity also affects which assets buyers want. They may avoid accounts receivable or slow-moving inventory if your working capital structure isn't solid. Buyers want assets that help the business run from day one without taking on more short-term debt.

Good financial health helps with financing. Lenders review liquidity and solvency closely. If your business looks risky on paper, the deal can fall through due to lack of funding.

Quick Financial Health Check for Sellers

Before listing your business, take a quick look at its financial health. This helps you spot problems early and strengthen your position.

Start by reviewing the last 12 months of cash flow. Look for patterns. For example, are you regularly short on cash or paying bills late?

Then, calculate a few simple ratios:

• Current ratio = Current assets ÷ Current liabilities
• Quick ratio = (Cash + Accounts Receivable + Marketable Securities) ÷ Current liabilities
• Debt-to-equity ratio = Total debt ÷ Owner's equity or shareholder equity
• Interest coverage ratio = Earnings before interest and taxes ÷ Interest expense

Watch for red flags like high debt, slow-paying customers, or frequent cash shortages. These can raise concerns for buyers.

When planning your exit, if you come across issues, start making changes six to 12 months before listing. Improving cash flow, reducing debt, or tightening expenses can make a big difference in how your business is valued—and how fast it sells.

Strengthening Your Finances Before Selling

Focusing on financial planning can make your business more appealing. Buyers want to see a company that runs smoothly, pays its bills on time, and isn't weighed down by debt. The cleaner your numbers, the easier it is to build confidence and close a sale.

Improve liquidity by:

• Collecting any unpaid invoices to increase your cash position
• Reducing excess inventory that's just sitting on shelves—holding less stock means more available cash
• Keeping more of your profits in reserve rather than spending them—buyers like to see a cushion

Strengthen solvency by:

• Paying down high-interest debt and reducing long-term liabilities
• Looking for ways to raise profit margins by cutting costs or adjusting prices
• Improving your overall net worth and stability

Clean up financial statements and get rid of any irregularities. Fix misclassifications, check for errors, and make sure all metrics are clear and easy to follow. A good financial picture gives buyers fewer reasons to hesitate and more reason to pay your asking price.

Take the Next Step

Strong liquidity and solvency don't happen overnight, but they're worth the effort. A financially healthy business sells faster, for more money, and with fewer complications.

Whether you're planning ahead or ready to move forward, having the right support makes all the difference.

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