Financial Statements and Business Pricing
On the page
I discussed the recasting of the financial statements. On the page
I discussed how the lack of financial statements can present more risk to buyers and drive the price down. As you can imagine, the quality of a business's financial statements can make or break a deal. On this page I will discuss some of the financial documents a seller should be able to produce at the time his or her business is put on the market.
Concerning financial statements - quality is better than quantity. It is better to have only a one or two years worth of statements that are accurate, and are in order, than to have twenty years worth that are not uniform, have missing data or are just plain wrong. A professional business broker will recast your financial statements but they should not alter them. My personal opinion is that a business broker should not be doing this since the broker has a financial interest is getting the business sold.
If your business's records need some work I would suggest you speak to your CPA or bookkeeper before you put the business on the market. Why? A buyer does not want encounter any irregularities in the due diligence phase. If you were a buyer and were examining the financial records and discovered inconsistencies, would that raise some red flags? Also, if your books need some work and it is tax season your CPA may be too busy to address the problems.
Here are the main financial documents that I recommend you review, prepare and have in order.
Your Lease: Many owners are surprised when I ask about their lease. (If you own your building you can disregard this.) Your lease is not really a financial record but a contract that you or your business are committed to. Leases and landlords can be a reason that a transactions falls apart. Landlords do not care if your business sells, their concern is keeping their space leased and the keeping the rent coming in. Some items to watch for: What does your lease say about "subleasing" or "assigning" the lease? Is it allowed? Some items you may want to think about that may not be written in your lease: Is your current lease significantly below market rents? If so, there is a pretty good chance the landlord will want to raise the rent, if that occurs, the increased rent could have a significant impact on the business's bottom line. If you are on a month to month lease, will the landlord write a new lease for a long period of time? This is required for a SBA loan and is often needed for other types of financing. Does you landlord have plans to sell or renovate the building? If they do then getting a new lease may be difficult for the would-be owner.
Income Statement (P & Ls): Ideally, you should have the three most recent year's income statements or P&Ls. These are the statements that are "recast." A new owner needs to see what is coming in and what is going out. The income statement determines how "sell able" your business is.
Tax Returns: (Three years) This helps verify the P&Ls and is additional proof of a business's income. The tax returns could take the place of the P&Ls if needed. The SBA and conventional lenders will tax returns to lend the buyer money to buy your business. The are very few deals that are all cash.
FF&E: Furniture, fixtures and equipment list. Providing an equipment list helps the buyer know what they are getting.
Balance Sheet: A Balance sheet shows the "book value" of a business for a point in time. We use this to determine the value of the furniture, fixtures and equipment to be sold with the business. It is essential to have a balance sheet for a stock sale.
List of Accounts Payable: Plus any other liabilities, long or short term.
Accounts Receivable Aging: This is needed to determine how much "working capital" will be required by a new owner. This is a frequently overlooked area of the transaction.
All cash business? No records? The reality is some businesses do not have good records. If this is the case, we will provide you forms to complete and sign. This may present a risk to a buyer and could hurt your asking price but if your figures are "verifiable" (invoices, bank statements, etc.) you can successfully sell your business. All is not lost. I have represented clients where this is the case.
Providing documentation helps me, the business broker, market and sell your business. With the proper financial statements we can provide a complete picture to buyers and prove to them what the business is earning. Please note that "surprises" are another big reason that deals fall apart. If in doubt - disclose. More than likely, a competent buyer will discover irregularities in the due diligence phase, and if they feel they have not been told something it could really hurt your credibility and possible derail the entire deal.
Do you have questions about your business's financial statements? Contact me
and I will be happy to discuss your situation. All inquiries are kept completely confidential.
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