When selling a business, one of the most important steps is to prepare your financials. Prospective buyers will want to see a clear and accurate picture of your company's financial health, including your revenue, expenses, assets, and liabilities. By preparing your financials in advance, you can help ensure a smooth and successful sale.
Here are some key financial documents that buyers will want to see when evaluating your business:
Profit and Loss (P&L) Statement: Your P&L statement is a summary of your revenue, costs, and expenses for a specific period of time, usually a month, quarter, or year. This statement shows your company's net income or loss and is a key indicator of financial health.
Balance Sheet: Your balance sheet shows your company's assets, liabilities, and equity at a specific point in time. This statement provides a snapshot of your company's financial position and can be used to assess your liquidity, solvency, and overall financial health.
These are the two key documents that nay buyer will want to see. Usually they will want the documents for the past three financial years, however sometimes they may want to look further back and additionally once you get further down the process of a sale buyers will want to see an up to date version at the latest possible date. So if your financial year ended in March and it is now August, they will want to see the P&L and Balance sheet for the end of July.
Two other commonly asked for documents are:
Cash Flow Statement: Your cash flow statement shows the inflows and outflows of cash in your business over a specific period of time. This statement is important because it shows how much cash your business generates from its operations, as well as from investments and financing activities.
Tax Returns: Buyers will want to see your business's tax returns for the past several years. This will help them assess your company's profitability and identify any potential tax liabilities.
Finally the Accounts Receivable and Payable are often two of the most requested and examined documents from the more detailed financial information: Buyers will want to see your accounts receivable and payable, which are the amounts that your customers owe you and the amounts that you owe to your vendors and suppliers. This will help them assess your company's cash flow and working capital.
In addition to these key financial documents, buyers will also want to see other financial information, such as:
Sales and revenue trends over time
Gross margins and profitability by product or service
Breakdown of costs and expenses by category
Capital expenditures and investments in the business
Debt obligations and other liabilities
Customer and vendor contracts
Preparing your financials for sale can be a complex and time-consuming process. Here are some tips to help you get started:
Start Early: Ideally, you should start preparing your financials at least six months before you plan to sell your business. This will give you enough time to gather all the necessary documents and to make any necessary adjustments to your financial statements. There is nothing worse than being caught out by due diligence requests and having to start preparing financial information from scratch at that stage. Not only will it delay the process it can lead to a buyer becoming concerned with the lack of accurate financial information at hand and puts you as a seller on the backfoot at the worst moment to be so. So start early!
Use Accurate and Consistent Accounting Methods: Buyers will want to see financial statements that are accurate and consistent over time. Make sure that you are using reliable accounting software and that you are following generally accepted accounting principles (GAAP).
Clean Up Your Books: Buyers will be turned off by messy or incomplete financial statements. Make sure that your books are up-to-date and that all transactions are properly recorded.
Identify and Address Issues: Buyers will likely perform their due diligence and uncover any issues or discrepancies in your financials. It is better to identify and address these issues proactively, rather than waiting for the buyer to find them. If a buyer finds out late on in the process this will only create distrust and uncertainty leading to inevitable price reductions from the buyer or even them cancelling the deal altogether.
Hire a Professional: If you are not comfortable preparing your financials yourself, consider hiring a professional accountant or financial advisor to help you. A professional can help ensure that your financials are accurate and complete, and can provide valuable insights into your company's financial health.
In conclusion, preparing your financials is a critical step in selling your business. By providing buyers with clear and accurate financial statements, you can help ensure a successful sale and maximise the value of your business. By starting early, using accurate accounting methods, cleaning up your books, addressing any issues, and hiring a professional, you can prepare your financials for sale with confidence.
At Dexterity Partners, this is at the heart of what we do in our Fit to Sell and Fit for the Future analysis. We make sure that before we commence with any deal or start engaging with interested parties, we have the financials not only prepared but reviewed and any issues are addressed at the start and not at the end when it is too late. This allows us to ensure we go into the process on the front foot, instil confidence in any buyer by the preparedness of the business and at the end of the day this helps to mitigate the risk of a deal falling through and ensures that the sale can be completed.