On Deal Talk, we often hear from former business owners who have sold their companies or professionals who are dedicated to helping entrepreneurs sell their...
Preparing Financial Statements When Selling
You have invested many years in starting, running and operating your business. To maximize the value of your company, you must position it in the best light. One of the most important things you can do to maximize the value of your company is to clearly organize and reconstruct your financial statements.
What should I do if I have a cash business and have very inaccurate financials?
If this is the case, you have a few options. This can become a bit sticky, but hang in there, we get this done all the time.
Only give the buyer verbal information and offer the buyer an observation period during which he can observe the business and determine the cash flow for himself. This is very practical for retail type businesses with fairly consistent cash flow from week to week (liquor stores, restaurants, etc).
Give the buyer a projection/pro-forma financial statement. If you do this, you must be extremely careful. You should clearly state at the bottom that the document is an estimate and the buyer should not base his/her decision to buy your business on the document. Most buyers prepare a projection that very clearly depicts the actual situation; however, they clearly mark the document as a “projection” to limit their liability.
For more information on selling a cash business, see our article “Selling a Cash Business.”
What kind of financial information do buyers ask for?
Buyers typically ask for two to three years of Profit and Loss Statements (shows your income and expenses) and occasionally, a balance sheet. Experienced buyers will want to know how the business is currently doing and will ask for a year-to-date profit and loss statement.
Should I just give the buyer the raw data or financial statement?
No, no, no. Never.
You should reconstruct the financial statements to accurately reflect the true profit of your business. If you are like most business owners in the United States, you hate paying incomes taxes. Most business owners write off their personal expenses through the business, such as their cell phone, gas for their car, personal vacations, personal products (Home Depot, Wal Mart, etc), and virtually any other expense they think they can deduct through the business.
Recasting or normalizing your financial statements is quite simple in theory; however, it can require some experience and knowledge if you want to get it just right. The process is simple. It is best to have your profit and loss statement (also called income statement) in Excel with three columns. In the first column are the original numbers from the financial statement, in the second column are the adjustments to the financials, and in the third column is the recasted or normalized numbers.
What kind of backup material should I have in addition to my financial statements?
Most buyers will ask to see bank statements in addition to your financial statements. The bank statements should match to your financial statements. Some buyers will hire an accountant or CPA (Certified Public Accountant) to perform the financial due diligence. You can be sure that the accountant will reconcile the financial statements with the bank statements, and possibly, the invoices or receipts.
If you are extremely serious about selling, then I highly recommend that you organize the backup data for the financials for the prior two to three years. It is best to organize the data by month. Organize the bank statements, invoices, receipts, etc. for every month either into a hard folder or into an organized folder on your computer. You should also document any add-backs or adjustments to the financial statements as well. For example, if you added back $1,500 from the telephone line expense on the profit and loss statement, then you should be able to document this.
What financial statements should I show to a buyer before he/she makes an offer?
It is appropriate to show a buyer a profit and loss statement or P&L (also called income statement) and possibly, a balance sheet before an offer is made. If the financials are not accurate, then it may make sense to tell the buyer this upfront and stress to them that they just need to spend time in the business to get a full understanding of how the business operates financially.