Business Sale: Prepare to Show Your Financials

This article describes the financial information that buyers are likely to request and how you can be ready to provide it. 

In most business sales, the purchase price is largely based on some multiple of the subject company’s net revenues and adjusted earning capacity. It should come as no surprise, then, that a major focus of most buyers is on the company’s income statement and related financial information. 

That is especially true when the buyer is a private equity group or other type of “financial” buyer, which is the case in seven out of 10 deals that we have closed over the last several years. As we discuss in a related article (“Selling Your Business? Recognize the Three Types of Business Buyers”), financial buyers’ scrutiny of your financial information stems from the importance they place on EBITDA – earnings before interest, taxes, depreciation and amortization – as an indicator of market value. 

Your preparedness in providing financial statements and related reports will generally come into play at two key stages: first, before your business goes on the market, when we draft the “confidential information memo” (CIM); and, second, after you have signed a buyer’s letter of intent and entered the due diligence phase. At that point, the financial information that your buyer requests will quickly exceed the scope of the summary totals contained in the CIM. 

Responding quickly and fully is crucial in moving your sale toward a successful close, and helping you anticipate and respond to your buyer’s requests is a valuable part of our facilitation of your sale. 

Checklist 

While the types of information that a buyer may request vary with the type and size of the business and the specifics of the transaction, here is a general list of statements and reports that you should be ready to deliver during the negotiation and due-diligence phase: 

• Income statements, actual and recast (discussed below) 

• Cash flow statements (a detailed record of all cash received and spent by your business) 

• Statements of financial condition (“balance sheets”), actual and recast 

• Financial projections 

• Verification of all assets and liabilities (debt disclosures) 

• Sales data 

• Loan balances 

• Accounts receivable aging 

• Accounts payable aging 

• Bank statements (3-12 months) 

• Bad debts 

• Inventory 

• Income tax returns 

• Payroll records and reports (1099s, W-2s, etc.) 

Recasting Your Financials 

From the buyer’s point of view, your business’s market value is greatly influenced by their profit expectations under their ownership. 

To show your company’s true earnings and book value, we will faithfully recast your financial statements, with an emphasis on removing personal and other non-business expenses that a buyer would not incur. 

The emphasis here is on profit “add-backs” – i.e., discretionary or peculiar expenditures that can be added back to the profits of the business. Add-backs increase EBITDA, show what the company’s cash flow would be with a generic owner at the helm, and enhance market value. 

While our recasting of your financials can help present your business’s financial health in its most favorable light, that effort will be greatly enhanced if you stop incurring those expenses as you start preparing your business for sale. 

Cleaning Up Your Financials 

While recasting your financials is a task we perform, “cleaning up” your financials is something that only you can do. As examples: 

• Make sure your inventory and asset records align with what is physically there. 

• Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc. (This will not be accomplished overnight; if you need to improve the quality of your financial advisors, this is a good time to break bring them in.) 

• Rid your income statement of non-business expenses. Dubious moves designed to lower your tax bill can come back to haunt you when it’s time to sell. 

• Sell or dispose of unproductive assets or unsalable inventory. 

• Buy off any assets that are primarily for your personal use. 

To that last point, as soon as you start thinking about selling, stop running personal or nonessential purchases through your business. This might require you to make a behavioral adjustment; for as long as you’ve owned the business, you might have used those non-business expenditures to reduced its taxable income. But now you’re in sell mode, and if your business is likely to sell for a multiple of four times earnings, each of those non-business dollars spent is going to cost you four dollars in selling price. 

The sooner you clean up your non-business spending, the less we will have to recast in preparing to introduce your company to buyers. 

Producing the CIM 

Our recasting of your financial information is completed before the business goes on the market. The recast numbers are summarized in the “Financial Highlights” section of the confidential information memorandum (CIM), which describes your business and suggests its true market value. 

To help preserve confidentiality, we provide your CIM to a prospective buyer only after they sign a confidentiality agreement and pass our screening process. 

As a simple example, here is how an IBG M&A professional categorized the recast financials in the recent sale of a law firm: 

P&L SUMMARY (four years) 

• Total revenues: $____ 

• Gross profit: $_____ 

• Adjusted expenses: $_____ 

• Operating income: $_____ 

• Other income/expenses: $_____ 

• EBITDA: $_____ 

ADJUSTMENTS 

• Owner’s salary reduced to replacement attorney salary: $_____ 

• Owner’s retirement contributions added back: $_____ 

• Owner’s insurance added back (life, health, long term care, personal liabilities): $_____ 

• Interest, depreciation, and amortization added back: $_____ 

• Added-back expenses not associated with normal operations: $_____ 

• Adjusted to market rate: owner’s building rental expense charged to company: $_____ 

HISTORICAL REVENUES (10 years) 

BALANCE SHEET SUMMARY (accrual/cash basis, based on recast financials) 

• Assets 

• Total current assets: $_____ 

• Total fixed assets: $_____ 

• Total other assets: $_____ 

• Liabilities and Shareholder Equity 

• Total current liabilities: $_____ 

• Total long-term liabilities: $_____ 

• Total other liabilities: $_____ 

• Total Shareholder Equity: $_____ 

FURNITURE, FIXTURES AND EQUIPMENT 

• Valued of owned equipment, by category, by location 

• Cost of leased equipment, by category, by location 

The underlying detail for the summarized figures referenced above were included in the reports provided during the due-diligence phase. 

CONTACT US 

With a track record of more than 1,100 successful closings, at an 86% closing rate (three times the M&A industry average), IBG Business is well-equipped to help you be fully prepared for the successful sale of your mid-market business. 

To start the process of assembling your financial information and selling your company for top dollar, to the best-fit buyer, contact an IBG Business M&A professional near you.