There are many ways to improve the attractiveness of a business before selling it. Potential buyers are looking to purchase companies that are growing and profitable. They want to purchase businesses that are efficiently run, have a strong and loyal customer base and stay ahead of the competition. Although buyers look at all of these facets, as well as several others, cash flow is what really catches their attention. This is why before listing your business for sale, your top priority should be to focus on minimizing your expenses and maximizing your presented earnings. This will help you to put together your balance sheet, which will show buyers how you utilize your cash. Follow the tips below to demonstrate your company has healthy cash flow and make a good impression on buyers.
Document Your Accounting Processes
Buyers need to have a clear picture of your financial situation, including accurate financial statements for the past few years. The lack of reviewable records is a huge red flag for buyers. You don’t necessarily need to have audited records, as long as they are prepared in accordance with typical accounting standards. Make sure all of your accounts are reconciled, and the reconciled balances are shown in your financial statements. Review everything to make sure account balances are posted to the correct categories. For example, cash, accounts receivable, and inventory should be posted as current assets, and fixed assets as non-current assets.
The easiest way to ensure your documents are ready for a sale is to keep up with them regularly. Make sure you have consistent monthly accounting processes and a reliable system. Any mainstream accounting software can help you to adhere to standard practices and export financial statements that can be easily reviewed or audited by a buyer’s accounting firm. Having these practices in place from the start of your business will help you to be prepared to provide statements at any time, at a buyer’s request.
Consolidate Your Expenses
Put together an itemized list of monthly expenses, so you can figure out where to trim out unnecessary ones. This can include outdated advertising expenses, unused subscriptions or costly equipment that is infrequently used. Look for non-recurring expenses as well. You may have some personal expenses, such as lunches and vacations that you charged to the company. Anything that is not directly related to the business should not take away from the company’s future cash flow.
You can also search for any excess depreciation above what is necessary to cover replacement costs on capital equipment. Insurances for yourself or for employees are examples of obligations that will not be transferred to the buyer so they should also be left off of the balance sheet. Many buyers are perceptive enough to know how to rule out these expenses on their own, but you can save yourself the trouble and some money, by cutting them out in advance.
Recast Your Financials
Business owners often report a high number of expenses for the benefit of saving money on their tax bill. Consequently, financial records do not clearly exhibit the true earning power of the company. Additionally, even though the records may be accurate, they do not reflect how the company would be operated under new ownership.
Once you have consolidated your expenses, it’s time to recast your financial statements to demonstrate more pre-tax income. This process includes leaving out expenses that would not transfer to new ownership. It also includes adding back any company profits taken as additional salary for the owner to reduce the company’s tax burden. Some equipment that should be capitalized is often recorded as an expense by business owners. You should recast these expenses as fixed assets. Repairs and maintenance can also be capitalized. Making these changes can increase the asking price of the business by raising its overall value.
While you must disclose to the buyer if business financials have been recast, buyers generally accept them. They may even do recasting on their own, to see what the business’s cash flow would look like under their ownership. Make sure you have sufficient documentation to support your changes. It would be to your benefit to have your financials recast by a qualified, outside professional, such as a business broker. They can ensure that you do not miss anything and that your financial statements are in accordance with proper accounting standards.
Organizing your financial statements is all part of putting your best foot forward when selling your business. Your goal should be to show the buyer that every dollar has been accounted for and demonstrate the true earning potential of the business. This will show buyers that the business is not only profitable, but well run. It can also them to see a pathway to running the business as its new owners. Being well prepared with all of your financials before listing the business for sale also helps to maintain momentum in a deal. The last thing you want is for a buyer to lose interest because they waited too long for you to get your books in order.
Do you own a business in the Fort Myers, Naples, Sarasota or Tampa areas? Are you considering the sale of your business? The brokers at Corporate Investment Business Brokers (CIBB) in Fort Myers can help you prepare your Southwest Florida business for sale and advise you on how to prepare and structure your financial statements. Contact CIBB to get a free, no-obligation consultation and business valuation.
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