Accurate Financials - the Single Most Important Item to Sell Your Business
Now could be the best time in years to sell your business. Get ready to launch with solid financial reporting.
by Dave Driscoll
All indicators point to a very active merger-and-acquisition climate in the lower middle market, a market Metro defines as companies for sale with revenue of $1.5 to $20 million. However, listing a business for sale with less-than-descriptive financials will lead to delays, missed opportunities, buyer and seller fatigue, and frustration.
You won’t get the true value of the business when you sell without accurate, complete historical financials that tell the story of your business. As I tell owner after owner, “You can’t sell what you can’t prove.”
From my professional-business-broker perspective, the lack of detailed financial information makes successfully selling your business much more challenging and time-consuming on all sides. The availability of financial, market and operational data directly impacts the effort to determine the true market value of a business. Clearly, the more detailed your historical and current financial information, the more accurately we can generate the valuation and asking price of the business.
When you are selling a business, reliable financial information is an absolute necessity for prospective buyers to analyze a purchase. The buyer’s initial motivation to buy the business must be supported by the financial reality that the business will be a profitable investment. Buyers need to see the numbers, break down the expense accounts and understand the seasonal flows of the business.
Solid financial reporting can seal the deal. In contrast, a lack of financial data creates questions and red flags in the buyer’s mind: Is the current owner hiding something? Am I missing something that will come back to bite me? Do I have the whole picture? This type of uncertainty usually drives away good buyers; at best, it results in a lower offer for the business.
In addition, the buyer’s lender will need accurate financials to analyze financing options. In the lower middle market, cash buyers are very scarce, so financing is crucial. In the unlikely scenario that a buyer with the capacity to buy the business outright could be found, a prudent buyer certainly wouldn’t pay cash for a business if they didn’t have full faith in the numbers.
Do yourself a favor to put more money in your pocket: Institute processes and procedures to generate detailed financial statements on (at least) a quarterly basis. Use one of the accounting software packages that are easy to learn and maintain, or seek the advice of your accountant. Watching your numbers regularly will give you the best opportunity to move them in the right direction!
So, if you are considering capitalizing on current M&A market conditions, you need organized, authentic financial information that supports a market-driven asking price. Even if you don’t intend to sell your business for several years, be aware that five years of historical financials is generally needed, so begin generating and analyzing your quarterly financials now. Without solid financial records, you are sacrificing funding for your future.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and succession/exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.