Selling Your Business? Make the Financial Story Easy for Buyers to Follow

Thinking about selling your business?

One of the most useful things an owner can do before buyer discussions become serious is make the company’s financial story easier to understand.

A prospective buyer may begin with revenue and profit, but deeper questions often follow.

Where does the revenue come from?

Which expenses are recurring?

Why did performance change from one year to another?

Are unusual expenses easy to explain?

Clean, organized financial information can make those questions easier to address.

Revenue Is Only the Beginning

A buyer may want to understand more than annual sales.

Depending on the business and transaction, questions may include:

How revenue has changed over time
Which products or services generate revenue
Whether sales are recurring, seasonal or project-based
Whether major customers represent a significant share of revenue
Whether recent growth appears sustainable

The objective is not to make the numbers look better than they are.

It is to make the underlying business easier to understand.

Keep Financial Records Organized

During a business-sale process, buyers and their advisors may request financial information as part of their review.

Depending on the transaction, that information could include items such as:

Profit-and-loss statements
Balance sheets
Tax returns
Cash-flow information
Banking records
Other supporting financial records

The exact documents vary by transaction.

Having records organized before due diligence begins can make the process easier to manage.

Understand Unusual or One-Time Expenses

Privately held businesses sometimes have expenses that require additional explanation.

There may be one-time costs, unusual purchases, owner-related expenses or other items that do not reflect ordinary operations.

If those items are material, the seller should understand what they are and be able to support the explanation with appropriate records.

Any financial adjustments presented to a buyer should be accurate, supportable and reviewed with the appropriate accounting or transaction professionals.

Be Ready to Explain Changes

A buyer may notice when revenue, margins or expenses change significantly from one period to another.

Those changes are not automatically negative.

But the owner should understand what caused them.

Examples might include:

Loss or addition of a major customer
Hiring
Expansion
Temporary supply costs
Pricing changes
New products or services
Seasonality
Other business-specific events

Being able to explain the numbers is part of presenting the business clearly.

Separate Business Performance From the Owner’s Memory

Many owners know their businesses extremely well.

They may be able to explain every change from memory.

A buyer, however, does not have that history.

The records should help support the explanation without requiring the buyer to rely entirely on the seller’s recollection.

Make the Numbers Consistent

Financial information presented in different places should tell a consistent story.

If the seller’s summary, financial statements and supporting documents show materially different figures, buyers may have additional questions.

Before going to market, review the information being used to describe the company and identify discrepancies that need to be explained or corrected by the appropriate professionals.

Understand the Difference Between Revenue and Cash Flow

A company can show strong revenue while still experiencing cash-flow pressure.

Likewise, a business may have significant cash movement that does not necessarily represent operating profit.

Buyers may want to understand how the business generates cash and what working-capital requirements are necessary to operate it.

Do Not Wait Until Due Diligence

Financial organization is easier to address before a buyer is waiting for answers.

Owners considering a future sale can begin by asking:

Are financial statements current?
Can major revenue trends be explained?
Are unusual expenses documented?
Do the records tell a consistent story?
Are accounting and tax records organized?
Can important financial questions be answered clearly?

Clear Financial Information Can Make the Business Easier to Evaluate

The purpose of financial preparation is not to manufacture a particular valuation.

It is to give prospective buyers and their advisors a clearer view of how the company has performed and how the business operates financially.

EIN Business Brokers provides a starting point for owners considering the future sale of their businesses and preparing for the transaction process.

Business valuations, buyer interest, financial adjustments, transaction structures and closing outcomes vary by company and circumstances. Owners should work with qualified accounting, tax and legal professionals regarding their specific records and transaction.

Frequently Asked Questions

What financial records may buyers request when reviewing a business?

Requirements vary by transaction, but buyers and their advisors may request financial statements, tax returns, cash-flow information, banking records or other supporting documents during due diligence.

Why should financial records be organized before selling a business?

Organized records can make it easier to explain historical performance, respond to buyer questions and support the information presented during a sale process.

What if my business has unusual or one-time expenses?

The seller should understand and document material unusual items. Any adjustments presented to a buyer should be accurate, supportable and reviewed with appropriate accounting or transaction professionals.

Does cleaner financial reporting guarantee a higher valuation?

No. Valuation depends on many factors. Better-organized financial information can make the business easier to evaluate, but it does not guarantee a particular valuation or sale outcome.