If you’re considering selling your business, it’s important to remember that prospective buyers are looking for clear, objective facts that will convince them that your business will be a profitable investment for them. Although they may initially be attracted to your business for other reasons, their primary interest will be the bottom line. This means that you need to provide them with comprehensive, organized documentation and solid bookkeeping that demonstrates the historical performance of your business and back up your asking price.
Preparing solid financials ahead of time will help determine a fair asking price, while giving you the opportunity to identify gaps or shortcomings.
In order to get started in making an accurate assessment of your business, you’ll need to prepare your financial statements, ideally, for the past two to three years. Hopefully you’ve been keeping your business records in order. If not, roll up your sleeves, gather your papers together and prepare to get organized well in advance of your listing. You’ll be glad you did, as this will make the selling process go much more smoothly.
To ensure the integrity of your financial records, it would be wise to seek the assistance of a small business CPA. A professional CPA can help you identify any gaps or shortcomings that could be improved. Moreover, buyers often place more weight on financials that have been scrutinized by a qualified accounting professional. Professionally audited financials often have more validity and the potential to increase your asking price.
Compile the following documents in preparation for your business sale:
- Profit & loss statements for the current and past 2-3 years
- Current balance sheet
- Cash flow statement
- Business tax returns for the past 2-3 years
- Copy of the current lease
- Insurance policies
- Non-disclosure/confidentiality agreement
- Personal financial statement for the buyer to complete
- Executive summary of overview of the business
- Detailed profile describing the business
- Any additional documentation to substantiate the financial representations
- Professional certificates
- Supplier and distributor contracts
- Employment agreements
- Offer to purchase agreement
- Note for any seller financing
Preparing your financials will help you develop improvement strategies and increase the value of your business.
Getting your financial records and reviewing them for accuracy will not only help you in determining a fair asking price, it will help you identify certain pitfalls and develop improvement strategies. Why not improve the value of your company now while keeping an eye towards future sales? Once your records are in order, you’ll have the means to determine and improve your earnings multiples. Price-to-earnings ratios are dependent on numerous factors, and adequate preparation will afford you the time to act to improve the value of your business.
This is also a good time to engage with a professional business broker. By developing a relationship with a business broker ahead of time, you’ll have the opportunity to learn what buyers are looking for, what’s in demand, and ways in which you can make your business more attractive and easier to sell. A business broker can also help you determine a fair asking price and the best time to market your business for sale.
Buyers will expect to see certain documents that show your business is profitable and a good investment.
Taking the time to collect and organize the right documents will make your business more appealing to potential buyers. Solid documentation of a profitable history is perhaps the clearest way to illustrate the financial value of your business. Being prepared with an organized package of documents not only reflects well on you and your business, it will ward off unnecessary stress.
That being said, be aware that a buyer may request confidential information from you, such as customer lists or supplier contracts, which you may not be comfortable disclosing in the early stages of the transaction. Should this occur, it’s best to explain to the buyer why you feel uncomfortable; at the same time listening to their point of view. Keep in mind that they are researching their future investment, and you both want the transaction to go smoothly. If you are comfortable disclosing confidential information, be sure to have a signed NDA (Non-Disclosure Agreement) in place prior to doing so.
Comprehensive, organized record keeping, including strong financials, are a critical part of the sales process. By applying this practice ahead of time, you’re more likely to impress prospective buyers with a well-managed business and viable enterprise. At the same time, you’ll be able to develop strategies that will increase the value of your business, thus making it easier to sell for the full market value you deserve.