For entrepreneurs who have established and grown a successful business, the decision to sell their business is one of the most complex and difficult choices they will ever have to make. Historically, many entrepreneurs start or purchase a business with little to no thought about their ultimate end game or exit strategy. Very often their attention and efforts become singularly focused on the present and all that is necessary to help the business survive during the early years. For most, a shift in thinking to more long-range issues is often slow in coming, and in many cases doesn’t occur at all until the time for a sale is imminent. Maybe the reason for the sale is some factor beyond the business owner’s control (such as a divorce or unexpected disability), or maybe it’s due to exhaustion, burn-out, or just the simple realization that the most opportune time to sell the business is now. Regardless of the reason, one cannot overstate how preparing a business in advance for sale can greatly impact the value and marketability of the business. It is for this reason that all entrepreneurs and owners of closely-held businesses must think about, and take affirmative steps toward, positioning their business for sale during the three to five years preceding the actual sale. In point of fact, once the decision has been made to entertain purchase offers at some point in the future, the real hard work for the business owner begins.
In this blog series, we will highlight five (5) things every small business owner should consider well in advance of any sale transaction. At the top of any business owner’s list of sales considerations must be the status of his or her internal financial reporting. A seasoned purchaser will typically ask to review the most recent three (and sometimes up to five) years worth of financial information regarding the seller’s business in advance of any transaction. The more formal your financial statements (CPA-audited statements are preferred by purchasers, however, CPA-reviewed or CPA-compiled statements may be sufficient), the better first impression you will make on the prospective purchaser. When a savvy purchaser reviews a business with poor, incomplete, or uncertified financial statements, the purchaser will likely make certain general assumptions about the business it is targeting.
In most cases, the prospective purchaser will be inclined to assume that the lack of good financial data means the seller’s internal operations are somewhat loose and inefficient. More times than not, purchasers are apt to believe that good financial reporting leads to tighter internal controls, and better in-depth operational analysis, which can then be used to implement best practices critical to increasing profitability. To the extent the seller’s financial reporting (or lack thereof) has left a negative impression, the amount of risk the purchaser may be willing to assume (e.g. the size of the purchase price he or she may willing to pay) is likely going to be negatively impacted.
Additionally, when a prospective purchaser comes across a seller with substandard and uncertified financial reporting, if they are not otherwise scared away altogether, the purchaser will invariably be forced to dedicate significant time and resources to independently verify the seller’s financial statements. This verification process is often very costly, and some purchasers will insist upon receiving a credit against the purchase price in order to recoup all (or some portion) of their costs related thereto. Moreover, this process can take significant time, which will inevitably delay the closing and the seller’s receipt of the sales proceeds, and is often times a serious interruption to the seller’s ongoing day-to-day business operations. In point of fact, the purchaser’s internal auditors and outside accountants will routinely require the seller and/or the seller’s key financial officers to help re-trace financial transactions for the years in question, which prove to be a considerable distraction to those critical members of your executive management team. On top of that, in many instances the prolonged presence of such strangers in the seller’s office often raises questions and suspicions among the seller’s own personnel. As the internal questions begin to surface, word often leaks-out that a sale of the business is being considered. At that point, the fertile minds of key employees, suppliers, and customers begin to wander, and the proverbial “horse is out of the barn” forever, which could strain key business relationships and/or compromise your negotiating leverage with the buyer.
The first step to a successful sale transaction is having accurate, thorough, and certified financial reporting that can be presented to any potential purchaser. In our second installment in this blog series, we’ll highlight the some of the more important portions of the financial statements that can help you increase the purchase price you receive.