When selling a business, you can’t underestimate the significance of important financial statements. Buyers will be paying close attention to assess the value, health, and potential of your business. Having clear and accurate financials can speed up the sales process and increase the business’s value. Let’s take a closer look at financial statements and how they can affect the sale of your business.
Key Financial Documents in a Business Sale
Balance Sheet: This document provides a snapshot of the company’s financial position at a given point in time. Buyers will use it to assess the company’s assets, liabilities, and shareholder equity. It also provides the basis for computing rates of return and a company’s capital structure. A strong balance sheet shows financial stability and instills confidence, while one with excessive liabilities can be a red flag for buyers.
Income Statement (Profit & Loss Statement): This document shows the company’s revenue, costs, and profits over a specific period. Buyers can use this to assess the company’s profitability and operating efficiency. Revenue growth and healthy profit margins show a well-managed, profitable business. This is highly attractive to buyers.
Cash Flow Statement: This document highlights the flow of cash in and out of the business including operations, investing, and financing activities. Buyers use it to evaluate how the company’s is able to generate cash and sustain operations. They want to be sure that your business can cover expenses, repay debt, and invest in growth. Consistent positive cash flow shows this.
Why Buyers Scrutinize Financial Statements
Risk Assessment - Understandably, buyers want to fully understand any risks tied to investing in a business. Financial statements help them spot potential red flags such as declining revenues, excessive debt, or inconsistent cash flow.
Valuation - Financial statements are used to calculate the value of businesses using metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Accurate financial data impacts a business’s sale price. They have a large hand in determining whether the business will be perceived as overvalued or undervalued.
Predicting Future Performance - Buyers will also look at financials in order to gauge possible future performance. If your records include healthy financial statements, this suggests a stable and sustainable business model. Erratic figures could indicate challenges and cause buyers to pause.
How to Prepare Your Financials for a Sale
Ensure Accuracy and Transparency - It is essential to hire professional accountants to audit and organize your financial records. This way any discrepancies and outdated figures can be corrected in order to present a true picture of the business’s health.
Regular Financial Reporting - Businesses with consistent financial reporting habits show professionalism and organized management.
Highlight Growth Potential - In order to highlight your business’s growth potential, use your financial statements to highlight positive trends, such as revenue growth, improving margins, or strong cash flow.
The Role of Financial Statements in Due Diligence
Before closing a sale, buyers conduct detailed due diligence by using financial statements to look for red flags. You can expect prospective buyers to request several years' worth of statements to evaluate trends and assess long-term viability. The more organized and clear your financials are, the smoother it will be for buyers to conduct due diligence and move on in the buying process.
The Need to Know
Remember, the maintenance of accurate, detailed financial records when preparing to sell a business is essential and a large part of the process for the buyer. The key financial statements mentioned—balance sheet, income statement, and cash flow statement—are essential tools that help buyers make informed decisions. There’s no getting around it… It is absolutely worth investing the time and resources into preparing your financials to maximize the chance of a successful sale. Professionals are a must when it comes to preparing these documents. HartmannRhodes is here to guide you through this process if you are ready to sell and get the maximum value for your business.
Mark Hartmann is a three-time Inc 500|5000 CEO with a rich sales, operations, and leadership background in the insurance, financial services, and healthcare sectors. With extensive experience growing and selling his own businesses, Mark leverages his expertise to help owners grow and sell businesses valued at $1M —$25M. He’s earned a Master of Business Administration from Eastern University, a master of science degree in organizational change management from St. Elizabeth University, and a graduate certificate in executive coaching from Columbia University. Mark’s professional certifications include Certified Mergers and Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).