Tips to Sell Your Business
J. Scott Hunter and Matt Wiese
January 3, 2012
There are three things a business owner should do to prepare for the sale of a business. Two suggestions deal with accounting systems and financial statements. They apply right now. The third suggestion deals with due diligence documents and corporate cleanup, which comes into play as you move closer to the sale process.
One of a buyer’s first few questions about your business will include, “Are your financial statements GAAP?” GAAP stands for Generally Accepted Accounting Principles. While there are a variety of different accounting systems, GAAP is the standard system in the United States and is the sum-total of rules, standards and conventions that accountants follow in recording and summarizing transactions and preparing financial statements. GAAP financial statements are not the same thing as financial records maintained for tax reporting.
Many small businesses keep their books based on a method, though not GAAP, that works just fine. But if you plan some day to sell your business, keep the following in mind: If you keep accounting records according to GAAP, your business will be easier to sell and will probably sell for a higher price.
The reason is simple: buyers understand GAAP, and when they review a target company’s financial statements, they expect to see financial information they can readily understand. Banks and other lenders also want to see GAAP financials. If your accounting system and financial statements are not GAAP, a buyer will need to learn and become comfortable with the accounting system you use and may require you to convert your financial statements into something that is GAAP.
Not having GAAP financials will place your business at a disadvantage to other target companies that do have GAAP financials. Buyers want to compare the financial condition of one investment opportunity to another. They want to compare apples to apples. If you don’t have GAAP financials, you look more like an orange than an apple.
If the sale you contemplate will not occur for some time, talk to your accountant. Start keeping your books, or even a second set of books, on a GAAP basis. That step will pay off when you sell your business, borrow funds or seek outside investment. It will also pay off in terms of how efficiently you operate your business.
Provide the Best Possible Financial Statements
Demonstrating financial performance is different than financial results, i.e., how much revenue, profit or cash flow your business generates. What’s important is presenting financial data that demonstrates how you reached your financial results. You may own a business that makes money hand over fist, but if you don’t have reliable financial statements that reflect those results, buyers will be less interested in purchasing your company and may pay less.
If all other factors are equal, buyers pay more for target companies that have a good set of financial statements. A “good” set of financial statements can be described on a spectrum ranging from “best” to “not-so-best.”
On the “best” end of the spectrum are financial statements consisting of multiple years of balance sheets, income statements and statements of cash flows that have been audited by a quality independent accounting firm.
A clean audit opinion means that independent, unbiased, qualified accountants have looked at your financial statements and your accounting methods and have concluded that your financial statements fairly present your company’s financial position. Buyers love clean audit opinions. A small business with audited financial statements is easier to sell than an equivalent business that does not have audited financial statements.
The next best to audited financial statements are unaudited GAAP financial statements. As long as your financial statements are GAAP, buyers won’t flee in terror from unaudited financial statements. If your financials are not audited, however, buyers will spend more time and money doing financial due diligence. The deal will move slower, and the buyer may want to decrease the purchase price. There’s also a greater chance the statements may be inaccurate if not audited.
At the other end of the spectrum, and by far the least desirable, are unaudited, non-GAAP financial statements. The deal will be much tougher to do and may even limit the number of potential buyers.
Anticipate Due Diligence Requests
This suggestion applies in particular as your finger tenses on that deal trigger. Smart buyers will take a careful, in-depth look at your business. You can add a lot of momentum to a deal if you anticipate the buyer’s initial due diligence request, pull together a binder of introductory documents and clean up problems before they hit the buyer’s radar.
J. Scott Hunter is a shareholder at Clyde Snow. Matt Weise is an attorney at Prince Yeates. This article was adapted from Selling Your Business: How to Sell a Business in Good Times and Bad Times by Hunter and Wiese (BusinessZone Press © 2010).