Having impeccable financial records when selling your business not only reduces the time it takes to sell but also ensures you have the right valuation. Here’s how you should organize your financial records for a sale.
Key Takeaways
Keeping financial records is an integral part of doing business
It also comes in handy when you wish to sell your business at a premium
Having proper financial records will help you unlock the actual value of your business and reduce the negotiation period
Before putting your business up for sale, you need to put your affairs in order, incentivize top employees, find the perfect M&A advisors, and organize your financial records
The three financial documents that are most important during negotiations include your 5-year balance sheets, profit and loss statements, and a 5-year forecast
A lot of business owners start their ventures with the aim of selling after years or even decades. Building a business is a thrilling adventure that takes up a lot of capital, time, and effort. If you do it right, then you can easily sell your business at a premium.
But as good as your brand may seem, any buyer worth their salt will need you to prove the success of your business. This means you should have financial records spanning years before you even thought of selling your company. Having well-documented financial records will ease this process and help you get a great deal when negotiating.
4 things to do before putting up your business on sale
Whether you are retiring, your business has reached your goals, or life is pushing you towards a certain direction, it is imperative to make some preparations prior to the sale. Here are a couple of things you can do to ensure you have a successful deal.
1. Put your affairs in order
It is not uncommon to let your housekeeping slide from time to time. Your business may be running smoothly and even generating profits every month, but you know some things need a bit of straightening. Everything may be going well, but you know some unclear processes or contracts may not sit well with a cautious buyer. A review of these processes and contracts will come in handy when negotiating the sale of your business.
2. Incentivize your key employees
Business owners often forget about the role of key employees, such as managers, during and after the sale. While managers may not necessarily be shareholders, they can also hold the negotiations hostage. One way to avoid such a situation is putting incentives in place when looking to sell. You can promise them a sale bonus or give them some stock options to avoid last-minute power plays.
3. Find great advisors
You may be good at scaling businesses, but this does not guarantee that you will find great deals. Working with a trusted M&A advisor can add a lot of value to your business sale, and this typically pays for itself. Advisors will add years of experience and knowledge that can help you get much better deals. Just remember to tap experienced M&A professionals and not your favorite uncle who has been the family attorney for years.
4. Organize your financial records
Your financial statements will play a key role in determining the value of your business. However, you will seem less credible to a cautious buyer if your finances are a hot mess. You can get your finances audited by a qualified accountant years before the sale. This will reveal any financial weaknesses and give you time to rectify these issues.
Why you should keep your financial records in order before selling
Any serious buyer will want to know more about your business before making a bid. Some of the things you can expect your buyers to ask for include your businesses’ track record and profitability. Having these records on hand during the negotiation period will help convince buyers that you run a sound operation. This is important for three key reasons.
To ensure that you value your business perfectly before entering any negotiations
To tie up loose ends, such as late payments, fees incurred, or loan defaults
Reducing the amount of time you spend negotiating
If you regularly audit your business (at least once a year), preparing for the business sale should be easy-peasy. For those with disorganized records, it may take a bit of time to harmonize everything. Unorganized financials can also reduce the valuation of your company, even if you make handsome profits.
How to organize your financial records before selling your company
Several financial records will come in handy when looking to sell your firm. Your buyer will ask for a couple of documents before they commit to anything. Here is how you can get the right records in order before selling.
Profit & Loss statement for the last five years: The P&L statement for each company will vary as the line items are different for every firm. However, there are a couple of things that each P&L statement should highlight. These include revenue growth for the last 5 years, cost of production, operating expenses, EBITDA margins, and interest expenses, among others.
Balance sheets: A balance sheet shows the accounts and ledgers at a specific point in time. This makes it a great financial document to compare the health of a business at different periods. A comparison of balance sheets for the last five years can show buyers the state and growth of your company. An analysis of your balance sheets should show the business has solid cash flow, stable inventories, minimal debt, and stable asset levels, among other qualities.
5-year forecast: This should be an exciting part for anyone building a successful firm. With a 5-year forecast, you get to predict how impressive your company will be in the near future based on the trajectory you are currently on. The numbers should show your predicted valuation in the next 5 years and are likely to be scrutinized by any buyers, so make sure they are rooted in reality.
Let SF&P Advisors put your financial documents in order
Working with M&A Advisors, such as SF&P, can go a long way to ensuring that you get the best deal out there. We work tirelessly to ensure our clients get successful outcomes in any M&A deal. Simply contact us today for a quick consultation.