Clean Financials Are Important for a Smooth Sale Process
It's an all too familiar dichotomy for those close to small business sales and succession planning. On one hand, a seller with well-managed business financials conveys a consistent story, backed by data, and unlocks a smooth sale process with few surprises from the buyer’s vantage point. On the other hand, the seller with poor record-keeping uncovers inconsistencies in historical data or has major issues verifying information during buyer diligence, leading to a stalled deal process.
Selling a small business is a significant milestone that requires careful planning and thorough preparation, but it’s often too late to unwind years of poor financial record keeping come sale time. Ensuring that your business is ready for a sale can maximize its value and smooth the transaction process. The considerations below will help sellers take proactive steps to prepare financials for the sale process.
Clean Accounting and Financial Record Keeping
Maintaining clean and accurate financial records is a critical aspect of preparing your business for a sale. Potential buyers will derive confidence from the financial health of your business, which is reflected in your financial statements. Here are key elements to focus on:
Accurate Financial Statements: Ensure that your financial statements, including income statement, balance sheet, and cash flow statement, are up-to-date and accurate. This provides a clear picture of financial performance and health. If you do not have an internal team member to oversee financial statement construction and accounting standards, consult with an external accountant.
Consistent Record Keeping: Consistency in financial reporting is essential. Buyers will look for trends in revenue, expenses, and profits. Over time, changes to accounting methodology can impact each of the three core statements. Inconsistent records can raise red flags and reduce the perceived value of your business. Beyond the three core financial statements, some businesses opt to track and report operating data that helps buyers understand granular trends in the business.
Internal Controls: Implement strong internal controls to prevent fraud, errors, and accounting inconsistencies. Internal controls enhance the credibility of your financial statements. Ensure that all financial transactions are properly documented and reviewed regularly by more than one person.
Adjusting Statements for Add Backs
When preparing financial statements for a sale, it's important to adjust for expenses that are not necessary for the ongoing operation of the business. These expenses can be added back to the profit to show the true earning potential of the business and provide a more accurate picture of the business’s profitability. Examples of add backs include:
Owner’s Compensation: Salaries and benefits paid to the owner that a new owner may not incur.
Personal Expenses: Any personal expenses that have been run through the business.
Non-Recurring Expenses: One-time expenses that are not expected to recur in the future, such as legal fees.
Adjusting for add backs helps potential buyers understand the true profitability of your business and its potential for future growth.
Making Strategic Decisions for Continued Growth
In the lead-up to a sale, making strategic decisions that support the continued growth of the business is essential. Just because a sale process is near doesn’t mean a business will function on autopilot. Business owners should maintain focus on core operations to drive continued growth. Below are a few considerations for strategic decision making:
Invest in Marketing and Sales: Don’t neglect your marketing and sales efforts, which can lead to revenue declines. A robust sales pipeline and strong customer base make your business more attractive. And remember that investment doesn’t necessarily entail increasing cash allocation. Instead it can mean formulating a plan with a team, making intentional decisions about a customer acquisition approach, and encouraging disciplined execution of that plan.
Inspect and Enhance Operations: Look for ways to improve the cadence of day-to-day operations. This could include a review of processes, exploring new technologies, or taking a fine-tooth-comb to procurement to look for slack in vendor relationships.
Develop a Strong Management Team: A capable and experienced management team can run the business effectively without the owner’s constant involvement, making it more attractive to buyers.
Understanding Owner Goals and Role Post-Transaction
Before selling your business, it’s important to understand your personal goals and what role, if any, you want to play post-transaction. This clarity can influence the structure of the deal and the type of buyer you seek. Consider the following:
Financial Goals: Is a liquidity event a key outcome from the sale process? Or do you desire to roll a sizable portion of equity into the acquired business? Retirement is a leading reason for business sales, so cash at close and tax planning are often at the forefront of sale processes.
Future Involvement: Decide if you want to stay involved in the business after the sale. Some owners prefer to step away completely, while others might want to stay on in a consulting or advisory role. Most buyers will request that, at a minimum, a seller supports the business through a transition period. This period can range from three months to a year, or more, and is an important point of alignment for the buyer and seller.
Succession Planning: If you have a family business, consider succession planning and whether you want to pass the business to a family member or sell it to an external buyer.
Understanding your goals and future role helps in negotiating the sale and finding the right buyer who aligns with your vision.
Increase the Odds of a Sale With Strong Financial Records and Clear Goals
Preparing your financial records and strategically planning for the sale of your business is crucial to achieving a successful exit. Clean and accurate financial records, adjustments for add backs, strategic growth decisions, and clear personal goals all contribute to making your business attractive to buyers and maximizing its value. By following these tips, you can increase the odds of a smooth sale process and avoid many of the pitfalls that lead to stalled deals during buyer diligence.
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