When selling your business, it is necessary to “normalize” or “recast” your financial statements to maximize the income of your business. Most business owners deduct numerous personal expenses through their business that ultimately lower their net income. By clearly identifying those additional “perks” for the buyer, you increase the value of your business by increasing the cash flow.
Yes, nearly every buyer is going to ask you to see your financial statements. Many buyers will ask to see them before they ever meet you and often during your first conversation with him/her.
Usually, you can discern a lot about the business from the financial statements even if not all of the income is reported. In our estimation, nearly 90% of business owners do not report all of their income. Just because your financial statements are not accurate does not mean that the buyer will not want to see them. Many buyers are aware of this fact, however, most would still like to see the financial statements to see what you are reporting. You should inform the buyer early in the process if your financial statements are not accurate. Ask the buyer if he/she is familiar with how a small business is run to help you decide how to present the information to the buyer.
The primary financial statement that buyers need to see is called the “Income Statement” or “Profit and Loss Statement” (P&L). Few buyers will ask to see the balance sheet (the second type of financial statement) and few owners actually prepare a cash flow statement (the third type of financial statement).
Income Statement / Profit and Loss Statement – This financial statement shows the income or sale of the business less its expenses. This document lists both the income of the business and the expenses.
There is no magic formula here, however most buyers will ask to see two to three years worth of financial statements. If you have only been in business for one year, then you only show the buyer one year. Common sense is required when determining how many years of financials to show to a buyer. Most buyers will often ask to see current financials, such as a year-to-date (YTD). If they are savvy, then they will ask to see the year-to-date (YTD) with a comparison for the same time period for the prior years to account for seasonality in the business.
If you show a lot of profit on your tax returns, then we would recommend showing your tax returns to the buyer (we do notrecommend giving them a copy) early in the process. If you are like most business owners and you prepare your tax returns to minimize taxes and not maximize income, then you should tell the buyer that if you gave your tax returns to every buyer who asked for them, then there would literally be dozens of your confidential tax returns floating around the city.
By the way, we are referring to federal income tax returns, not your personal tax returns. If you are a sole proprietor, then this would be your Schedule C. If you are a corporation, then it would be your 1120 or 1120 S or 1065 if you are an LLC. Few buyers ask to see your state income tax returns for your business.
After an offer is accepted, you should then release your federal income tax returns to the buyer, if they request it.
No, you should always recast/normalize your financial statements to maximize the income of the business and thus, the value of the business. We have only seen a few financial statements that did not require any adjustments.
If you are like most business owners, you likely deduct some personal expenses through your business such as your personal automobile or cell phone. While you can often deduct these personal expenses, they are often not necessary to run the business. To “normalize” or “recast” your financial statements means to remove these personal expenses or “perks” as if you had never written them off in the first place. By doing so, you maximize the profit of the business and thus, its value.
The easiest way is to export your financials from QuickBooks to Excel and then copy and paste them using our simple template and make the adjustments within the Excel file.
There are three columns in the Excel file:
Then either password protect the Excel file or save it as a PDF document and show to buyers.