Organizing Financial Performance for the Sale of Your Business
In continuation of our series on the Value Builder System, we’ll discuss the importance of your business’ financial performance. The buying and selling of businesses comes down to a common bottom line: will this transaction make me money? By organizing and legitimizing your books before the sale, you are helping all parties have peace of mind and confidence in a successful transaction.
As the seller, you have poured countless hours and resources into your business. Now, buyers are looking for you to prove that their investment is going to be a good one. Setting up your financial performance in the most positive light you can manage is a critical piece of a successful transaction.
What can you do to be prepared?
Begin Gathering Your Documents
Count on the required records going back anywhere from three to five years. Before you ever begin fielding offers, you need to have gathered your documents into a safe place, in both digital and hard copy form. As new financial statements and profit/loss statements are completed, add them to the files.
Buyers may also ask for a pro forma document, wherein the seller predicts (with the help of his/her financial advisors) the value of the business. You can also offer an observation period, during which the buyer can monitor cash flow over the course of a few weeks. This is especially valuable if your business keeps a relatively consistent level of customers all year.
The Lamanna Alliance, a business and financial advisory company, recommends preparing the following four documents before beginning the sale process:
- Balance sheet, where you show the company’s assets, liabilities, and ownership assets
- Income statement (profit/loss statement), which shows all income, profits, and loss for a fiscal year.
- Statement of cash flows, which shows all cash flow in and out, as well as investing activities
- Changes in the financial history of the company over the last 3-5 years
Accurate and Fair Valuation
What is it about a small business that can make it so appealing to a potential buyer? It all starts with an accurate and fair valuation. Buyers want a business that is worth more than the sum of its parts, but that has the parts necessary to run well. That includes everything from experienced employees to necessary equipment. Combine that with an established customer list, and you’re looking at a company that’s going to sell rather well to the right buyer.
Neglecting to portray all of the value that your company would bring means leaving money on the table. In order to accurately and fairly portray that value, you must invest in a third-party appraisal. According to Biz Fillings: “Guessing at the value of your business is likely to result in either a price that’s unrealistically high and turns off many potential buyers, or a price that’s unnecessarily low and keeps you from cashing out at full value.”
These appraisals are done by CPAs with specialized training specific to business appraisals. They are able to quantify the different assets that your business has to offer, then condense these numbers into a single figure that helps both you and the seller understand what’s at stake. Appraisers are also responsible for providing detailed reports as to how they got that figure. Allowing an unbiased third party to calculate your final value gives both you and the buyer peace of mind that everyone is coming to a fair financial agreement.
Set the record straight before you sell your business by evaluating your financial performance. Invest in an appraiser to see the true value of your company’s assets and give the seller confidence in the deal. While it may seem like extra time and effort today, it will pay dividends in the future.
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