Preparing to sell? Why clean financial records are important.
Most business owners don’t like to spend any more time on financial statements than they have to. Trust me, I was one of them! But, when it comes time to prepare a business for a potential sale, owners need to get serious because having clean financial records is one of the most important factors in concluding a successful business sale or merger.
What do I mean by clean financial statements?
First, all relevant business transactions are recorded in a well organized chart of accounts. You should be able to present an accurate P&L and Balance Sheet for each accounting period. Most buyers will want to look back three to five years. Of course you should have followed accepted accounting methods and have applied those practices consistently over several years. Not doing so makes it harder to compare your company to its industry peers. Also, the recorded transactions should clearly reflect what is going on in your business because prospective buyers use financial statements to study how a business is managed and spot opportunities to improve operations under their ownership.
Another part of what makes financials “clean” is not having an excessive amount of commingled personal expenses, assets and liabilities on the books. When preparing your business for sale, an M&A Advisor will review your financials with you and help identify expenses, such as personal auto expenses or other owner benefits, that might be adjusted back into the net profit of the business when it is presented to potential buyers.
Think of your financial records as a window into the quality of your business overall. Presenting clear, well organized financials to buyers makes a good impression of your business. Financials that are disorganized or hard to follow give buyers the impression that there are other problems in the business, which detracts from receiving maximum value, or, even worse, causes them to walk away.
While potential buyers may be attracted to your business initially based on its top line, industry or business model, they quickly move to the important task of evaluating the details. And more often than not, that process starts with analyzing the past several years of financial statements.
You will have more buyers and can make the process of selling your business much easier by having clean financial records. If you are considering selling in the next 3-5 years and are not certain that your financials qualify as “clean”, give us a call. Or, ask your CPA to give you their objective feedback, from a buyer, buyer’s CPA, investor and lender perspective.
Mark Soeth is an M&A Advisor with Exit Strategies Group’s Roseville California office.