Why Having Accurate Financials is So Critical When Selling your Business.
When preparing your business for sale, there is an extensive list of items you need to attend to in order to become sales ready. As you develop your exit strategy, one thing that you simply cannot afford to neglect is preparing accurate financial statements. While the marketing material to sell your business will tell prospective buyers the strengths of your business, accurate financial statements are the proof that support the marketing materials. Their accuracy is critical to the sales process. Inaccurate financial statements can derail a transaction by:
Ruining your credibility – If a buyer forms a view that they can’t rely on your accounts to understand the profitability of your business, then they may consider it too much of a risk to purchase and may walk away from the deal.
Slowing the process – When a buyer discovers an error in the accounts, they will often ask for a reduction in the price that they’ve offered, which the seller is often not willing to give. This can cause the sales process to stall as the buyer and the seller try to negotiate a way forward.
Impeding the ability to obtain acquisition finance – A buyer who is relying on external finance from a bank and/or investors to fund the acquisition could lose their opportunity to obtain funds, causing the deal to collapse.
In addition, inaccurate financial statements create a risk of a claim being made against you in the future by the buyer of your business for an error that causes them to incur loss under their ownership.
To minimise the risk of material inaccuracies in your financials, you should therefore ensure they are prepared by an appropriately qualified accountant in accordance with applicable accounting standards. You should discuss with your financial advisor whether it is necessary for them to be audited in advance of the sales process. In either event, the following checklist is helpful to ensure your accounts are presented in accordance with a buyer’s expectations:
Have the accounts been prepared on an accrual basis to ensure that revenue and expenses are recorded in the right financial period?
To what extent is there any capital expenditure, work in progress or prepayments that have been expensed through the profit and loss statement that should be capitalised on the balance sheet?
Are there any cash, deposits etc that have been received in advance of services being provided that have been recorded through revenue, when they should be recorded as a liability on the balance sheet through deferred revenue?
Have employee entitlements for annual leave, long service and potentially sick leave been included in the profit and loss statement and have they been calculated in accordance with applicable accounting standards?
In presenting your profit and loss for sale, have you made the following adjustments to reported profit to reflect the normalised operating earnings generated by the business:
Market rate salaries including on-costs (i.e. superannuation, payroll tax, workers comp, annual leave and long service leave), as well as bonuses, commissions and incentives for the owners and any relations of theirs that work in the business, that it would be reasonable to expect a buyer would incur under their ownership?
Any one-off, non-recurring expenses, for instance legal, or consultancy expenses?
Any expenses specific to your particular ownership of the business that would not be applicable to a new owner?
Any material expenses that relate to prior periods that have only been picked up in the current financial period, for example due to a supplier sending an invoice late?
The above is obviously not the full extent of what has to be prepared but hopefully will have given you some food for thought and encourages you to discuss with your accountant/advisor in more detail.
Preparing accurate financial accounts therefore requires a lot of attention, but it is critical they are prioritised in preparing your business for sale. Ultimately, they are fundamental to how prospective buyers will value your business and inaccuracies discovered along the way have the potential to derail a transaction.
Darren Shacknofsky, Head of Transaction Services, 12 June 2020