- A CPA
with small business experience may be able to immediately
lower your taxes by enough to offset his fees.
- There
will be new tax issues created by the sale
of your business, making your CPA's advice and expertise
even more valuable.
- Buyers
will trust your financial statements much more if a professional
has assemble them. And your financial statements will only
help sell your business to the extent the buyer trusts
they are accurate.
- The
Buyer will likely have a professional working for him -
a trained accountant who will be examining your statements
for accuracy and legitimacy. If you don't have a professional
on your side, you may be at a distinct disadvantage
when negotiating any points that center on your company's
finances.
The
3 Types Of Financial Statements
Compiled
Statements: Here the accountant simply compiles and organizes
the information you provide. But the accountant will not test
the accuracy of your information and will not vouch for the
statements.
Reviewed
Statements: Here the CPA goes one step further and takes
your compiled statements and compares the numbers to averages
or norms in your industry. Profit margin, return on equity
or any other metric that is important in your type of business
would be included.
If you
compare favorably to your industry's averages, this will certainly
be something you can point out to buyers. If you compare unfavorably,
at least you have identified weak areas that you can address
and improve.
Audited
Statements: If you decide it is worth paying for audited
statements, then your accountant will take the needed time
to test the accuracy of the numbers you have provided. Some
of the tasks the accountant may perform are to inspect a random
sample of accounts receivable for their legitimacy or conduct
an actual count of the inventory in your store or warehouse.
While
buyers will prefer to see audited statements, most sellers
decide they are not worth the extra expense. For most businesses,
Compiled Statements will be adequate.
Prepare
3-5 Years Of Statements
Ask you
accountant to prepare financial statements for at least
the last three years. Five years is preferred,
but unless your business is new, 3 years should be a minimum.
If you
have been in business for 10 years, but only provide the buyer
with financial statements for the last year, the buyer will
be understandably suspicious. Owners can make short
term changes that can make any business look healthier on
paper than it actually is. Reducing or eliminating expenses
for advertising, training or research/development are common
tactics owners make just before they put the business
up for sale.
Buyers
know this and will be on the lookout for just
this sort of short term fix.
The buyer
will want to see which way your business is trending
over the last few years. If the trend in profits and sales
is down, trying to hide that fact is not the way to go.
What
Buyers Look For In Financial Statements
Every
buyer will look for different things in your financial statements.
Below are some of the more common areas of interest to a buyer.
Ratios:
After
determining which direction your business has been trending,
buyers will examine your financial statements looking for
specific ratios. Each industry has it's own set of financial
ratios that are regarded as the most important.
Comparing
these numbers allows one business in an industry to be measured
against all other businesses in the same industry.
For example,
if you are in retail, the measure of "sales volume per
square foot" may be the first ratio a buyer looks for.
In restaurants, the "% of expenses devoted to food costs"
is always important.
If you
aren't familiar with the ratios that are most important in
your industry, check with the trade associations that serve
your business.
Some ratios
are common in all industries. "Return on equity",
"return on assets" and "debt to equity"
are some examples. But even with these widely used measures,
what is considered good, bad or average will change depending
on the industry.
Once
you know how you compare to your industry's averages you will
be much better prepared to meet a potential buyer.
Gross
Margins: The buyer will look at the gross margins for
each or your products (or product lines) to see if the trend
is up or down. Declining margins can mean either the product
is declining in popularity or the competition has increased.
Accounts
Receivable: Buyers will want to see to see how quickly
your receivables are paid. Receivables that are more than
30 days past due will be heavily discounted by buyers.
Net
Worth: As with so many of the items on your financial
statements, the buyer will be most interested in the trend.
Has the capital and accumulated earnings been increasing each
year or decreasing?
What
To Do In The Case Of Poor Financial Performance
You
can sell your business even if the financial performance over
the past few years has not been good.
Although
buyers will examine the past to determine you business' worth,
they will only buy it if the think the future is bright.
Many
buyers will think they are smarter than you and can improve
your business no matter how successful you are ... let
them think that! If they can see the potential
for success in the future then they will still be interested
- assuming you have priced the business accordingly.
Here
are some things you can do even if you company has struggled
in recent years:
