How To Organize Your Financial Statements For A Business Sale
Optimizing Your Phoenix Business Sale: Detailed Financial Documentation
When you are preparing to sell your Phoenix business, many factors play into the sale. One of the more detailed factors is having to gather up all of your financial statements. Those interested in buying your business will want to see these statements to determine whether they want to purchase or not.
It is critical to have your financial statements organized to market your business successfully and maximize its value. A Phoenix business broker will help you determine what Financial Statements you need to gather and the best way to present the statements for optimal sale results.
Essential Financial Documents Buyers Demand When Purchasing a Business
In a business sale, potential buyers typically request various financial statements and information to assess the health and viability of the business. The key financial documents they may ask for are:
- 3-5 years of Income statements (profit and loss statements)
- Balance sheets
- Cash flow statements
- Tax returns
- Accounts receivable and Payable Reports
- Financial projections
Financial Statement Requirements: Pre & Post-Offer Explained
To sell your Phoenix business, different requirements depend on whether you are preparing statements before an offer or after an offer. Before the offer, potential buyers often request a set of financial statements and documents to assess the business’s financial health. During this stage, there is no need to show source documents such as federal income tax returns or bank statements.
After the offer, during the due diligence process, more detailed and in-depth financial information is typically required. These more in-depth documents are only necessary once the offer is accepted. They include:
- Tax Returns: 3-5 years of business tax returns are usually requested.
- Detailed Financial Statements: More detailed breakdowns of income statements, balance sheets, bank statements, AR & AR reports, and cash flow statements.
- Financial Projections: Forecasted financial statements, including income statements, balance sheets, and cash flow statements.
- Tax Compliance & Filings: Comprehensive information on tax compliance, including any pending or potential issues.
Providing Raw Financial Data vs. Adjusted Financial Statements
A Phoenix business broker will tell you never to provide raw financial data when providing financial statements to potential buyers. Raw data can be easily misinterpreted and can lead to confusion as buyers do not understand what items in your profit & Loss Statements (P&Ls) are discretionary expenses the new owner may not necessarily incur. Therefore, it is wise to provide financial statements with the necessary adjustments or “add backs” for clear communication.
Adjusting your P&Ls will show potential buyers what your real earnings are. This is called your Seller’s Discretionary Earnings (SDE). Seller’s Discretionary Earnings is defined as the earnings of the business before interest, taxes, depreciation, amortization, one owner’s salary/compensation, owner’s benefits, discretionary expenses, as well as one-time and non-business related income and expense items. Some examples of discretionary expenses business owners run through their business are:
- Lease payments for vehicles not used in the business
- Cell phone expense for family members not working in the business
- Personal health, life, and disability insurance premiums
- Travel expenses
- Meals and entertainment
These adjustments are not something the buyer may be able to determine if they were to look at the raw financial data. These adjustments must be done ahead of time before you go to market to sell your business.
Why & How To Present Year-To-Date Financial Statements To Prospective Buyers
When you are selling a business, a potential buyer will request a year-to-date financial statement. Your Phoenix business broker may recommend that you provide them with the gross sales numbers only. Once you are in negotiations with a serious buyer, you can provide them with the adjustments on your YTD financial statement. It is wise to wait so that you do not have to update your financial statement each time you update your financial data that year.
It is also recommended that you give buyers a year-over-year comparison, allowing them to see how the current year is going compared to the previous year. If sales and profit numbers are trending higher for the current year, it may be an added incentive for your buyer to put in an offer.
Handling Financials In a Cash-Based Business Sale: Tips & Strategies
Cash transactions are not as common as they used to be, but there are some businesses such as restaurants or convenience stores that may be more cash-based and could face challenges reporting financials. If your business heavily relies on cash, the following is recommended:
- Keep copies of your cash register receipts.
- Allow the potential buyer to observe your business during business hours for a period of time so they can get an idea of your cash flow.
- Offer to carry a portion of the sales price in the form of a Seller’s Carry Note. This may give the buyer more confidence that you believe in your business.
Experience Peace of Mind When Selling Your Business with an Experienced Phoenix Business Broker
Phil Reese is a seasoned professional business broker who can help you navigate the complexities of selling a business, ensuring a smooth and efficient sale. With a deep understanding of the local business sales market and a commitment to client satisfaction, Phil Reese will guide you through each step, providing expert advice and personalized strategies.
Contact Phil Reese today and experience a seamless business selling experience!
Written By: Phil Reese
Phil Reese – Arizona Business Broker
Phoenix Location:
Email: [email protected]
Website: https://www.philsellsbiz.com
