To boost its value to your business It is essential to position your company in the most favourable image. A well-organised and properly reconstructed financial statements can increase its value to your company to prospective buyers. Through our many years of experience, these are among the most frequently-asked questions we receive concerning financial statements. Here are some suggestions for dealing with these:
- What kinds of financial data are buyers looking for?
- What financial statements should I present to a potential buyer prior to making an offer?
- What documents to backup create in addition to my financial statements?
- Should I provide buyers with raw financial information or amended financial statements?
- When do I need to provide annual financial statements to a prospective buyer?
- What should I do if I run an unreliable cash-based business that has inaccurate financials?
Table of Contents
- What Kind of Financial Information Do Buyers Ask For?
- Should I Give Buyers Raw Financial Data or Adjusted Financial Statements?
- When Should I Supply YTD Financial Statements to a Buyer?
- What should I do if I own a Cash-based business that is not accurate in its Financials?
What Kind of Financial Information Do Buyers Ask For?
Buyers generally request one of the following items:
- Between three and five years’ profit and loss (P&L) statements
- Balance sheets
- Statements from banks
- Federal income tax returns
- A comparison of the YTD P&L statement.
Before making an offer. It is advisable to present the buyer an P&L statement prior to an offer being made. In some instances it could be appropriate to provide the balance sheet with a prospective buyer.
After accepting the offer. Documents of origin like the federal tax forms as well as bank statements are usually presented only after an offer has been accepted. Many buyers would like to examine bank statements along with financial statements. The bank statements must be in line with those financial records as close as is possible.
The majority of buyers employ an CPA and accountant assist with an audit of their financials. An accountant will review the financial records and reconcile the amounts in your accounts as well as your bank statements as well as receipts, invoices and tax returns Family Office Singapore.
Organize your financial records. Business owners that are looking to sell their business should arrange the company’s financial records for the last three years, and then break them into a simple format that displays the information according to month. When offline documents are organized into the physical, labeled, folder system or are placed in the appropriate folders in your personal computer it is possible to plan for an time that the buyer is likely to look over all of the documents.
If you’d like to know more about it, check out an M&A Talk podcast I produced together with Helena Robbins on preparing for financial due diligence Difference Between Business Analytics and Data Science.
Should I Give Buyers Raw Financial Data or Adjusted Financial Statements?
Never provide potential buyers with the raw financial information without a detailed list of adjustments.
In giving buyers the basic financial information creates a lot of space for confusion and misinterpretation. If you provide buyers with “just the numbers,” you’re trusting that they’ll understand the way that all the pieces work together within the overall system. But, they won’t know the intricacies of your company, and they won’t be aware of any adjustments that need to be made to your financial statements.
Reconstruct your financial statements to reflect the actual profits of your business. Most business owners take personal expenses from their business including their telephone and utility bills, travel expenses automobile expenses and maintenance as well as personal items, and other costs that can be considered eligible.
The procedure of changing the financial statements to reflect correct income and expenses — also referred to in the context of “recasting” or “normalizing” your financial statements is easy. But the buyer has to know the business in order to understand the adjustments you need to make.
Begin using first your P&L statement, then format it into a four-column spreadsheet. Divide it in “Original” financial statement numbers, “Adjustments,” and “Normalized” numbers, with the fourth column designated for “Notes” or “Explanations.” This should meet the majority of buyers’ requirements.
When Should I Supply YTD Financial Statements to a Buyer?
Give gross sales figures for the year ahead in preliminary stages. If a customer wants an financial statement for the year to date it is recommended that you give them the total sales just that are for current years.
Create a YTD comparison P&L and make adjustments during negotiations. You may provide adjustments to your year-to-date financial statements when you’re engaged in negotiations with an interested buyer. In other words, you’d need to alter your financial statements each when it is updated with financial statements to reflect the year’s performance. Giving buyers gross sales figures for the current year ought to suffice.
We suggest providing buyers with an annual comparison. This will allow buyers to know how your company performs in comparison to prior years. It also allows buyers to build a forecast of the current fiscal year. (This is assuming that the cost structure hasn’t drastically changed.) For instance If it’s September, supply buyers with the sales gross for January to August in the previous year, and for January-August for the current year.
What if I Have a Cash Business with Inaccurate Financials?
Businesses that perform a large number on cash are getting less popular. From professional services to retail companies that rely on cash are faced with a myriad of difficulties in accurately reporting the various factors that are associated with the fluid, “liquid” nature of businesses that rely on cash.
If you’re selling a business that has significant cash components and you are selling a business with a cash component, we suggest these:
- Provide prospective buyers only verbal information with clear explanation of how they have the chance to verify and confirm the details with your records once an offer has been accepted.
- Give potential buyers the opportunity to have an time to observe where they can examine the company and assess the flow of cash.
- Give buyers the prospectus projection or pro-forma financial statement, but without a lot of caution. The bottom of each page of the document should clearly indicate it is only an estimation and buyers shouldn’t make purchases based on projections. It is important to describe the company’s situation as accurately as is possible. If you do declare the document to be”projection “projection,” you limit the liability of your company.
