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How to Sell a Business: Prepare for the Sale
Increase the chances of a successful sale by preparing your financial statements. Nearly every buyer will ask to see your financial statements at some point during the process of looking at your business. This typically happens fairly early in the process.
Are your financials straightforward, accurate, and easy to understand? If you are like most business owners, then you have probably not prepared your financial statements with the goal in mind to sell your business. Many business owners’ financial statements are often inaccurate, full of contradictions, incomplete, are sometimes completely unavailable, and most importantly, are not designed to help you sell your business. Most financial statements we see do not show the “real” profit of the business, but rather include unreported income or inflated expenses; all which lower the value of the business.
How to prepare your financial statements for a successful sale: The first step in preparing your business for sale is to “normalize” your financial statements. This involves making adjustments to your financial statements as if you had originally prepared your financial statements to sell your business. This process is called “normalizing” the financial statements. Most business owners unnecessarily deduct excessive expenses when operating their business. Unfortunately, these expenses lower your net income on your financial statements and thus, lower the value of your business. Many of these expenses are personal in nature or are unnecessary. “Normalizing” your financial statements involves removing these expenses (These are the “adjustments.”), which ultimately increases the value of your business.
Many business owners also do not report all of their income. This type of adjustment should not be made in writing. There are strategies for dealing with unreported income – this will be discussed in much depth later on in this guide.
What do we mean by “financial statements”? When we say “financial statements”, we are referring to your “income statements” or your “profit and loss statements.” This document shows the income and expenses from your business, and the net profit as well.
The process involves the following four steps:
- Retype your financials statements into Excel – we recommend three years.
- Your Excel spreadsheet should have three columns: original, adjustments and adjusted.
- Make the necessary adjustments to your financial statements.
- Click here to view a sample adjusted financial statement.
Sample adjustments include:
- Depreciation: This is a non-cash expense and should be removed.
- Interest: If the buyer is not assuming your debt or loans, this expense should be removed.
- Owner’s Salary: If you are drawing a salary from the business, this expense should be removed. This is ultimately going into your pocket anyway, so this should be added back.
- Amortization: Amortization is similar to depreciation; however, it is for intangible assets.
- Taxes: Income taxes should be added back if they appear on your financial statements.
- Non-Recurring or One-Time Expenses: This might include an investment in new equipment, development of a new website, unnecessary attorney fees, or any other unusual or one-time expenses.
The end result is an Excel spreadsheet that shows the original financial statements along with the adjustments and the adjusted figures. Instead of “net profit” you will now have a figure called “adjusted net” or “discretionary earnings.” Brokers also call this “Seller’s Discretionary Earnings,” or “SDE” for short. Click here to view a sample adjusted financial statement.