Thinking About Selling Your Business? Start Preparing Your Financials Now

A significant wave of business ownership transitions is underway.

Project Equity estimates that 2.9 million U.S. businesses are owned by people age 55 or older, representing about $6.5 trillion in annual revenue. As more longtime owners begin thinking about retirement and succession, an enormous number of privately held companies will change hands in the years ahead.

If your business may eventually be one of them, one lesson matters more than many owners realize:

Preparing to sell should begin long before the business goes on the market.

And one of the best places to start is with your financial records.

A buyer may love your company. They may understand the market, appreciate the customer base, and see growth opportunities you have not pursued yet.

But before they write a check, they are going to want to understand the numbers.

So will their lender. So will the professionals helping them evaluate the transaction.

That is why clean, credible financials can influence much more than whether due diligence goes smoothly. They can affect trust, financing, negotiations, deal terms, and ultimately the price a buyer is willing to support.

A Buyer Is Not Just Buying Your Story

Most business owners can explain their company better than anyone.

You know why one year was unusually strong. You know why margins dipped two years ago. You know which expenses were owner-related, which projects were unusual, and which costs are unlikely to continue under new ownership.

A buyer does not know any of that.

They see the records.

They may review several years of financial statements, tax returns, payroll records, bank activity, accounts receivable, debt, capital expenditures, customer concentration, owner compensation, and other operating information.

And they are trying to answer one central question:

Can I trust the financial story I am being told?

Consider two businesses that each report $1 million in annual earnings.

One owner can provide consistent financial statements, reconciled accounts, tax returns that support the numbers, and clear documentation for unusual expenses.

The other has unreconciled accounts, personal expenses mixed into the business, unsupported adjustments, and numbers that change depending on which report someone is reviewing.

The reported earnings may be identical.

The confidence level is not.

The Tax Strategy That Helped You May Look Different to a Buyer

This is where many owners encounter something they may not have considered.

For years, you may have worked with us to legitimately reduce taxable income through deductions, depreciation, compensation planning, timing strategies, or other appropriate tax-planning decisions.

Those strategies may have saved significant taxes.

But a buyer is looking at the business through a different lens.

They want to know how much the company can reliably earn in the future.

A seller may say:

“Once you account for owner-related and discretionary expenses, the business really earns more than the tax return suggests.”

The buyer or lender may respond:

“Can you support those adjustments?”

That does not mean the previous tax planning was wrong.

It means the strategies that made sense for tax planning may look different when someone is trying to establish the earnings and value of the company.

That is one reason to discuss a possible future sale with us early. Tax planning and exit planning do not exist in separate worlds.

This Is Where Add-Backs Enter the Conversation

If you sell your business, you are likely to hear the term add-back.

An add-back is generally an expense a seller argues should not reduce the ongoing earnings of the company because it is owner-specific, discretionary, unusual, or nonrecurring.

Examples might include certain owner expenses, family payroll, unusual consulting costs, one-time legal fees, or other expenses that may not continue after the transaction.

Some add-backs are relatively straightforward. Others receive much more scrutiny.

Suppose you tell a buyer that $150,000 of expenses should be added back to earnings. If those expenses are clearly documented and there is a reasonable explanation for why they will not continue, the buyer has something tangible to evaluate.

If someone has to reconstruct several years of transactions to figure out what actually happened, the same adjustment may be much harder to support.

The buyer is not simply paying for what you say the company earned.

They are deciding what they believe the company can continue to earn.

Uncertainty Can Become Part of the Deal

Sellers naturally focus on purchase price.

But uncertainty can affect far more than the headline number.

A buyer who is uncomfortable with the financial information may request more documentation, reduce valuation assumptions, hold back part of the purchase price, introduce an earnout, change working-capital requirements, or negotiate other protections into the transaction.

In other words, weak financial records are not merely a bookkeeping inconvenience.

They can become a negotiating issue.

Then the Lender Starts Asking Questions

Many business acquisitions involve financing.

That means the buyer may not be the only party evaluating your company's financial history.

A lender or underwriter may review historical earnings, cash flow, tax returns, existing debt, working-capital requirements, customer concentration, capital expenditures, and other financial information.

They want to understand whether the business can generate enough cash to support the debt used to acquire it.

If an underwriter cannot get comfortable with the numbers, the consequences can flow back to the seller.

The buyer may need more equity, different financing, a lower price, or a different transaction structure.

So financial credibility is not only about convincing the buyer.

It can also help the buyer get the transaction financed.

Your Tax Returns and Financial Statements Need to Tell a Coherent Story

Tax returns and financial statements serve different purposes, so differences between them can be completely legitimate.

But a buyer or lender may compare them.

They may want to understand why revenue, expenses, depreciation, owner compensation, inventory, or other items appear differently across the records.

The question is not whether every number matches perfectly.

It is whether the differences can be explained.

That becomes much easier when we have had time to understand the company's history and prepare before the sale process begins.

The Financial Statements Themselves May Matter

Not every financial statement provides the same level of assurance.

Compiled financial statements provide no assurance, reviewed financial statements provide limited assurance, and audited financial statements provide reasonable assurance.

That does not mean every business preparing for a sale needs reviewed or audited financial statements.

The appropriate level depends on the business, the transaction, and what a prospective buyer or lender may require.

If a sale is on your horizon, this is worth discussing before a transaction begins rather than after someone requests a particular level of financial reporting.

Some Sellers Choose to Look for Problems Before the Buyer Does

Once a deal becomes serious, a buyer may commission a quality of earnings analysis, commonly called a QoE.

A QoE is not the same as a financial statement audit.

A QoE generally focuses on transaction-related questions such as the sustainability of earnings, unusual adjustments, revenue quality, working capital, customer concentration, and other factors that may affect how the business is evaluated.

Some sellers choose to conduct a sell-side QoE or another pre-sale financial review before going to market.

The logic is simple:

Would you rather discover an issue yourself or have the buyer discover it during due diligence?

Finding something early gives you time to understand it, document it, and decide whether anything needs to change before negotiations begin.

Not every transaction needs a formal QoE.

But almost every seller can benefit from knowing what a buyer is likely to find before the buyer begins looking.

Time Is One of Your Biggest Advantages

If a buyer discovers a financial issue during due diligence, you may have only days to explain it.

If you discover the same issue one or two years before a sale, you may have time to do something about it.

You may be able to reconcile accounts, improve documentation, separate personal and business expenses, clean up old receivables, improve inventory records, document unusual transactions, or establish more consistent reporting.

Some issues can be fixed quickly.

Others need history.

If a buyer wants to see whether margins are stable, whether an expense is truly nonrecurring, or whether cash flow is improving, one cleaned-up quarter may not be enough.

That is why early preparation matters.

We Can Help You See the Business the Way a Buyer Will

Because we already understand your company's tax returns, financial statements, payroll, owner compensation, debt, and major transactions, we can help you begin looking at the business from the outside.

Questions worth asking include:

• Are the books current and reconciled?
  
  
• Do the tax returns and financial statements tell a coherent story?
  
  
• Are there expenses that may eventually be treated as add-backs?
  
  
• Can those adjustments be documented?
  
  
• Are there trends a buyer or lender is likely to question?
  
  
• Is the current level of financial reporting appropriate?
  
  
• Would a pre-sale financial review or QoE make sense?
  
  
• Are today's tax strategies consistent with your longer-term exit plans?

You do not need to be ready to sell tomorrow to start asking these questions.

In fact, that is the point.

The Best Time to Prepare Is Before You Need to Explain Anything

You may have spent 20, 30, or 40 years building your company.

When the time comes to sell it, you want the financial records to help tell that story — not undermine it.

A clean financial history can help buyers understand the business, help lenders evaluate the transaction, and help you answer questions with confidence.

It can also reduce the chance that avoidable uncertainty becomes part of the negotiation.

If selling your business may be somewhere in your future, talk with us now.

We can help you review your financial records, identify issues worth addressing, and begin preparing for the questions a future buyer, lender, or advisor is likely to ask.

Thinking about selling your business someday? Contact our firm and start preparing before the sale process begins.

 

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