You Won’t Sell a Business Without These Four Financial Statements

Posted by Rock LaManna

Four Financial Statements Needed to Sell a Business

 

Our #1 priority when you're getting a business ready to be sold is to prepare to disclose your key financial statements. In this post, Senior Financial Advisor Ron Castleman provides an explanation of what those key statements are, and why they’re critical.

Before we get into Ron’s key financial statements, keep in mind these financial statements represent a starting point between you and a potential buyer.  A buyer eventually will want to conduct an independent valuation of the business to ensure all the numbers are accurate and take into account current industry values.  These numbers, if they’re accurate and honest, will help ensure a synergistic match.

Let’s take a closer look at Ron’s key financial statements, which we touched on in our previous post about prepping your business for sale:

 

1. The Balance Sheet. This document reports on a company's assets, liabilities and ownership assets. It's important to understand that this financial statement reports on a given point of time, such as December 31, the close of the company’s fiscal year; it is a picture in time.

2. The Income Statement. This is referred to by various names, such as statement of revenue and expense, P&L, statement of profit and loss. This document differs from the balance sheet in that it reports on income, expenses and profits over a period of time, such as the complete or part of a fiscal year. 

Ron considers the P&L the most important document because, if done properly, it gives a complete picture of the operations of the business over that period of time. A buyer can see the precise activities of the company over that timespan.

Buyers, especially those already in the printing business, often want to know if the company for sale has excess capacity. The price a buyer is willing to pay depends not only on the financial condition of the existing business but also on what he believes he can bring to it.
 
3. Statement of Cash Flows. This statement reports on the cash flow activities of the business (cash in and out), and its investing and financial activities.

4. Changes in the Financial History of the Company.  Ron notes that this report is not always part of a financial statement, but is a document he prepares each time he values a company.  He compares no less than three, preferably five, years of financial activities.

Essentially, he wants to know what a company is doing financially over a longer period of time than what reported on by a single P&L. “Every company has good and bad years. I look for trends and reduce them to ratios,” Ron said.

For instance, does the company have control over its receivables in relation to its sales?  Are the costs of goods sold increasing proportionally to increases in sales? Are sales increasing consistently over a period of time? A buyer (and the owner) can get answers to those and other questions by comparing P&L statements over a period of time.

When Ron looks at these financial statements, he refuses to believe the accuracy of those numbers if the statements are done internally. He prefers statements prepared by a CPA because he wants to examine the accountant's notes to the financial statements.

Accountant’s notes sometimes explain the entries of the financial statements, giving insight to a company's financially performance.  Because Ron looks for trends, the notes help explain inconsistencies, such as a year in which certain tax advantages were taken or, as in the case of one company he analyzed, a theft which reduced its cash positions.

One Piece of the Puzzle

It’s important to note that these financial statements are the ideal starting point, but they’re just one piece of the puzzle – which we refer to as the “quantitative assessment.”  Just as important is the qualitative assessment of a company.
 
This includes an evaluation of your management team, your overall personnel, your equipment and your vision.  It’s where we ask the big questions:  What is your vision for the future?  How does your goals for tomorrow align with a potential buyer?

The qualitative assessment is critical, but everything begins with these key financial statements.  Their accuracy can ensure that the sales process gets off on the right foot, and gets buyers and sellers on the same page.


 
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Topics: M&A, Lean Operations