Did you know that of the many reasons business acquisitions or mergers fall through during the due diligence phase poorly maintained bookkeeping and presentation of financial data is among the top? Whether it’s inaccurate filings, lack of thorough books or something with a more significant impact, the truth is, no matter how successful a business you own, if your books aren’t in order, it will be tough to sell.
What Does “In Order” Mean?
While you may pay your taxes on time and file the appropriate paperwork, those are just the table stakes when it comes to having pristine books that will eventually lead to the sale of your company.
Getting your books “in order” for a sale requires much more than simple reconciliation at the end of each month. Consider if you have the right policies and procedures in place to ensure a clean balance sheet. That may mean showing maximized profits instead of minimizing taxes.
Staging your business for a sale also involves viewing the business from the buyer’s perspective and highlighting key elements of your business that differentiate it and make it attractive to potential buyers.
These elements can be accounted for (pun intended) in your bookkeeping practices if you begin planning to sell before you’re on the market or in need of an exit plan.
In other words, clean and consistent financials with no gaps are needed for books to be considered “in order.” Purchases will also look at your expense and income ratios to ensure profitability. For more information on how ensure your financials are clean and consistent, check out our due diligence checklist!
When Should I Begin Planning?
As the old saying goes, “The best time to start was yesterday. The next best time is now.” This holds true when it comes to planning and preparing your business to sell. While every business should approach their bookkeeping and financial reports from this perspective, we recognize that’s not always the case.
However, if you think a sale or merger may be an exit strategy for you one day, you should seriously consider preparing your business for a sale from a financial perspective today.
In our experience, it takes six months to a year and at least one year of tax returns with books “in order” to potentially be attractive to a buyer. For that reason, if you plan to exit in the next three to five years, beginning sooner only strengthens your position.
Company Valuation
Before entering the market with your company, we also recommend a third-party business valuation to ensure you understand its current market value. A valuation by an experienced independent valuation professional will give you a more realistic picture of what you can expect and, possibly, what you need to work on in advance of entering the market to improve your chances of a successful sale.
You’ll also want to determine the best way to sell your business and how much goodwill you plan to have. If you’re selling to employees or internally, many times that price is 2 – 3 times the value, whereas if it’s on the open market it can be up to 5 – 6 times the value.
More than your company valuation, it’s also important to consider why someone would purchase your business. In many cases, it’s not because of a revolutionary idea or intellectual property, but because of the processes and systems, company culture, or an industry vertical you’ve excelled in.
Buyers want to see a clear path forward and know they can turn a profit from their purchase immediately or within the first six months after purchase.
What Should I Look For?
When seeking out someone who can help prepare your financials for a sale, there are many things to consider. Many people only seek a great attorney for the best contract, but finding an excellent financial team to prepare your business is critical.
Look for accountants or a firm that specializes in your industry and has prepared businesses for sale in the past. Ask for what they’ll require from you and ensure you can provide the time and documentation necessary to help get your financials in order.
The sobering statistics show that 80% of businesses offered for sale remain unsold. To be in that 20% of businesses sold and demand top market price, start thinking now about selling your business and prepare your financials accordingly.
