How to Prepare Your Financials for a Potential Sale
Why Financial Preparation is Key to a Successful Sale
When it comes to selling your business, one of the most crucial steps is preparing your financials. These documents provide potential buyers with the information they need to assess the value of your business and its future earning potential. Well-prepared financials not only make the sale process smoother but can also help you command a higher sale price. Here’s a guide on how to prepare your financials to ensure you’re presenting your business in the best possible light.
1. Start with Your Profit and Loss Statement (P&L)
Your Profit and Loss (P&L) statement is the centerpiece of your financials. It shows your business’s profitability over time and provides a snapshot of your revenue, costs, and expenses. Buyers will look closely at this document to understand your business's financial health and operational efficiency.
Adjusted EBITDA or SDE: Beyond just showing your earnings, it’s essential to present an adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or Seller’s Discretionary Earnings (SDE). Adjusting for one-time, non-recurring expenses, owner’s compensation, and other discretionary spending gives buyers a clearer picture of the true earning potential of your business. This adjusted figure helps in assessing the ongoing profitability and cash flow potential under new ownership.
2. Pair with a Balance Sheet
While the P&L gives a view of profitability, the balance sheet provides a snapshot of your company’s financial position at a specific point in time. It details your assets, liabilities, and equity, offering insight into what the business owns and owes.
Complementing the P&L: When paired with your P&L, the balance sheet allows buyers to estimate a cash flow statement, although it may not reveal all potential risks. This combination is critical for understanding the overall financial health of your business and helps buyers gauge the sustainability of earnings.
3. Provide a Customer Concentration Report
Next on the list is a customer concentration report (often referred to as a revenue concentration analysis). This report is crucial as it shows how diversified—or concentrated—your revenue sources are.
Revenue Diversification: Buyers will want to know if your revenue is dependent on a few key customers or if it’s spread out across a broad base. High customer concentration can be seen as a risk because losing one major client could significantly impact the business’s revenue. Conversely, a diversified revenue stream indicates stability and resilience.
4. Breakdown of Payroll and Variable Expenses
A detailed breakdown of payroll and other variable expenses is essential for understanding the cost structure of your business. These expenses can fluctuate with the level of business activity, so it’s important for buyers to see how these costs align with revenue.
Consistency in Categorization: Keeping your expenses clean and consistently categorized year over year is critical. This consistency makes it easier for buyers to analyze trends and understand the true costs associated with running the business.
Owner’s Compensation: Be transparent about how you’ve paid yourself. Highlighting this is important, as many business owners use various tax strategies that can appear unconventional or confusing in the books. Clear disclosure here helps buyers adjust these figures to more standard practices and see the business’s true profitability.
5. Ensure Tax Returns Match the P&L
Finally, make sure your tax returns align with your non-adjusted P&L. Any discrepancies between the two can raise red flags for potential buyers and complicate the sale process.
Transparency and Accuracy: Consistency between your P&L and tax returns is vital for maintaining credibility. Buyers will be looking for any signs of financial discrepancies, and mismatches can lead to deeper scrutiny or even derail the sale. Ensuring these documents match reinforces the accuracy of your financial reporting and instills confidence in your business.
Conclusion: Preparing Your Financials for a Sale
Preparing your financials for a potential sale is about more than just organizing documents; it’s about presenting a clear, accurate, and compelling picture of your business’s financial health. By focusing on key areas like your P&L, adjusted EBITDA, customer concentration, payroll and variable expenses, and ensuring consistency with tax returns, you’re setting the stage for a successful transaction.
The better prepared your financials, the easier it will be for buyers to see the value in your business, ultimately leading to a smoother sale process and potentially a higher sale price. If you need assistance in preparing your financials or have questions about how to present your business to potential buyers, contact us today. We’re here to help you maximize the value of your business and achieve a successful sale.
