The Process of Selling Your Small Business: Step Two, The Financial Document Review

Welcome to the second step of the process of selling your business on California Business The second step of the process of selling your business is a review of the business's books. If you have not already read the page business pricing, I discuss the financial documents of a business in great detail there. I discuss which documents are important to have and I discuss how financial statements are recast to provide buyers with an accurate, discretionary earning amount.

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The financial document review between the business broker and the business owner can take place during the initial assessment meeting or during a subsequent meeting. In some cases a business broker may meet with the business's CFO, treasurer or CPA. Once the financial documents are reviewed, it may be determined that a formal valuation will be required. At this time, the business broker will discuss with the business owner, the various business valuations that are available and guide the owner to selecting the appropriate type of valuation for this business.

I generally try to gather the appropriate financial documents during the assessment meeting, recast them and then review the information during the financial document review meeting. During this meeting, I will describe the various add-backs that I included in the recap statement. It is also during this meeting where market data is shared with the business owner. I have access to various databases, which contain sold business information from across the United States.

Many business owners look at the business-for-sale websites to get an idea of what their business could fetch on the open market. While it is interesting to look at these businesses that are for sale, it is important to note that this is not a good method to use when pricing your business. Businesses are very different than real estate. The listing prices are irrelevant. What we do look for in market data is the actual sold price, the days on the market and the multiple of SDE cash flow that the business commanded.

Once we have a good sampling of market data and we have the recast financial statement, we can take the SDE figure that the business is generating and multiply that by an appropriate SDE multiple. Depending on numerous factors, this multiple can be anywhere from one to seven times earnings. Most small businesses, sell for one to four times the SDE earnings.

Once a listing price has been determined, the business owner and business broker will enter into a representation agreement. There are numerous other items that need to be discussed at this time, such as whether or not the seller wants to carry a note, the length of the representation agreement, the amount of a down payment that the seller would like, as well as other details that should be agreed upon prior to listing the business.

The financial document review is a very important step in the process of selling your business. It is important that the broker and the business owner agree on a listing price, but also that the listing price is backed up by financial records and market data. At some point a potential buyer will want to see and review this data.

If you are a business owner in the Southern California area and would like me to review your financial documents and present you with an opinion as to the value of your business, please contact me. Please note, that there is no fee and no obligation for either the assessment meeting or the financial document review. I look forward to learning more about your successful business soon.

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