Many small business owners underestimate the importance of having reliable financial statements on hand when the time comes to sell a business.
This article will explore some of the main reasons why you should have several years of accountant-prepared financial statements when you go to sell a business.
Valuing a Business One of the first steps in selling a business is coming up with a selling price or a business valuation.
In order to do so, a business broker or business valuator needs to have a complete financial picture of the business from which to conduct an analysis and form an opinion.
Too often, business buyers insist that there is unclaimed "cash" in the business.
An ethical business broker or valuator will not take this into account in their valuation as they themselves cannot validate this money to a prospective investor.
Presenting the business to buyers and due diligence A qualified business buyer will most certainly ask to review the financial statements of the company before consummating a transaction.
In fact, in the province of Ontario it is law that a buyer must be given financial statements and a detailed asset list prior to the sale of a business.
Once presented with the numbers, a buyer will usually take this information to their accountant for independent validation.
An accountant will certainly not advise their client to proceed with a deal unless the books check out.
In other words, business buyers need a good set of financials in order to give a green-light to a deal.
Getting a bank to approve a loan for a business acquisition The sale of a business really involves three different parties to the transaction - the buyer, the seller and the financial institution that will be financing the purchase.
Banks in Canada are especially conservative and will insist on valid financial information as well as relevant tax returns in order to pass their credit process.
Most banks in Canada will require recent accountant-prepared financials (less than 6 months old ideally) and will absolutely not consider "under the table" cash sales claimed by the owner.
The harsh reality is that even if a buyer and a seller want to proceed with a deal, it could all be a moot point if the bank is not in on the deal too.
Revenue that is claimed increases the valuation of the business Many business owners falsely believe that by pocketing cash sales that they will be saving money in the long run.
The truth is, not claiming cash revenue may save in the income taxes payable on that revenue but it is highly illegal and probably not worth it from a financial perspective too.
Consider an example where a business owner does not put through $1,000 in revenue.
The business owner may have saved about $200 in taxes payable by doing this.
However, from a valuation perspective if the business has a 3x earnings multiple then the owner just shaved off about $3,000 in overall business value from their company by not recording the sales.
The overall point is that if you are a business owner make a point to have a professional accountant prepare your business financial statements every year.
Keep all of your personal expenses distinct from your business too as it makes the process of selling your business so much easier.
The market to sell a small business is already difficult enough without the added burden of not having clean books to rely on.