Improve your chances of selling your business for maximum profit by presenting buyers with accurate and complete financial statements. Even if you have an upscale office, first-class employees and great branding, buyers will balk if they don’t see impressive and verifiable numbers on your financial documents.
If you don’t have a CPA working for you, hire one to assemble and double-check your finances. Selling a business creates complicated tax issues, and an accountant knows how to lower taxes, which means you’ll keep more of your post-sale money.
An accountant, along with a business broker, will help you fine-tune your company’s financials. Prospective buyers will have their own accountants looking over your financial documents. If you prepare financials without professional help, you run the risk of losing or delaying a sale.
At the first meeting, you may want to discuss basic financial information and let the potential buyer observe how your business operates. Let them come to their own conclusion about the company’s financial health. If you have a cash business, like a deli, you can also write a pro-forma estimate for a potential buyer. It should be clearly marked as a “projected” total to protect your interests. This is a temporary solution – you’ll still need to get your books in order for future negotiations and due diligence.
Your accountant should prepare at least two to three years worth of financial statements. For extra leverage with prospects, gather financial statements from the last five years. You can show buyers compiled, reviewed or audited statements.
- Compiled statements aren’t checked for accuracy. You simply hand the accountant your income statement, balance sheet and other financial records and he or she organizes them.
- Reviewed statements are compared to the average profits and performances for businesses in your industry.
- Audited statements are checked for accuracy by your CPA, who may go over accounts receivable records and inventory to ensure there are no mistakes in the original numbers.
Be honest. Buyers can see through incomplete or exaggerated information, so admit mistakes and tidy up your business financials
What is Financial Recasting?
Your business broker may recommend financial recasting of your accounting statements. This process improves transparency, Compiling financials is fine as a first step, but when it becomes apparent a buyer is interested, there’s no room for error on your financial statements.
Financial recasting is a fancy way of adjusting your income statements to tell potential buyers what they want to know about your company. Here are a few changes your accountant might make when recasting a financial statement:
- Take out interest payments made on business loans
- Write off uncollectible accounts receivable
- Adjust rent and owner’s salary to market rate
- Strike debt that won’t be assumed by the new owner
- Remove income and expenses that will cease after the sale
Indicate changes made to your original documents. This will increase the buyer’s faith in you and expedite the due diligence process. Your accountant may make changes to your income statement and balance sheet when recasting. Changes to the balance sheet indicate cash you’ll keep for yourself after the sale.
Buyers want to know how a business compares to other businesses in the same industry. Return on assets and return on equity are common ratios used in most businesses; check with your industry’s trade association to find out what ratios should be used for your business.
What Do Buyers Look For in Financials?
Buyers are more likely to make an offer to businesses that pay their accounts receivables within 30 days and have an increase in net worth for the last few years. They’ll also check the gross margins for your products to see if margins are increasing or declining.
Most small businesses prefer to use compiled statements during the sales process. This won’t harm negotiations with the buyer if you’re sure the initial figures are correct. If not, audited statements may prevent objections during due diligence.
Get expert advice on improving your business and financials for a fast sale by hiring a business broker. http://sellyourbusinessfast.info/ Call 1-800-BIZ-BROKER or visit us online at www.1800bizbroker.com. We’ve created a searchable database of business brokers and merger and acquisition specialists who want to work with you to sell your company for the best price possible. Contact us today for more information.