Even if selling your business isn’t on your radar right now, it’s important to remember that circumstances can change quickly. Having your financials in order before an opportunity or challenge arises can position you for success. Whether you’re selling your company, merging, or acquiring another, ensuring your business is financially prepared will help you get the most value and avoid potential pitfalls.
The truth is that many business owners understand their financials but often overlook what they need to look like from a buyer’s perspective. Buyers want clear, well-organized financial information that paints an accurate picture of your company’s value. Unfortunately, accounting is often treated as an afterthought in sales, mergers, and acquisitions (M&A), which can slow down negotiations and even derail a deal.
Accounting should be a significant component of any business process—not something to clean up at the last minute. Fact: your company’s financial health will be central to every acquisition conversation, and without a solid understanding of where your business stands, you won’t be able to close a fair deal.
Clean up your accounting for selling a business
Getting your financials in shape requires more than just tidy records. You’ll need to provide a transparent and accurate reflection of your company’s financial position, including historical performance and future projections. Here are the main areas you’ll need to focus on:
1. Separate business and personal expenses
Mixing personal expenses with business ones is a common mistake among small business owners. Doing so creates confusion and complicates the due diligence process. Buyers need to see a clear distinction between personal and business-related expenses, so ensure that any personal expenses are completely removed from your books for a more professional and credible financial picture. In fact, there are a variety of other reasons you shouldn’t comingle personal and business expenses. If you’re not keeping things separate, break that bad habit asap.
2. Correctly categorize assets and expenses
Misclassification of assets and expenses can skew your financial statements and reduce the perceived value of your company. For example, classifying capital expenditures as expenses can understate your assets and inflate your expenses. Take time to ensure that your books reflect the proper categorization of assets and expenses—this will have an impact on profitability and valuation.
3. Match revenue and expenses to the right period
Timing matters when it comes to financial reporting. Revenue and expenses should be matched to the period in which they occur. Accrual accounting, which records income when earned and expenses when incurred, is generally more accurate for reflecting a business’s financial health. Buyers want to know that your books adhere to standard accounting principles, so make sure income and expenses are aligned with the correct periods.
4. Track income and cost of goods sold (COGS)
You should have a clear system for tracking income and COGS, which directly impact your gross margin. Gross margin is a key indicator of profitability, and potential buyers will scrutinize these numbers closely. Misreporting or underreporting COGS can lead to inaccurate assessments of your company’s value. Implement a reliable process to ensure these figures are accurate and up to date.
5. Evaluate how the owner is paid
How owners are compensated can raise questions during a sale. Many small business owners pay themselves through a mix of salary and distributions, especially in S-Corporations where the structure offers certain tax advantages. However, unreasonable owner compensation can be a red flag for buyers if not handled correctly. You’ll want to ensure that your compensation structure, including payroll taxes and distributions, complies with IRS rules and is reasonable for your industry and company size.
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6. Analyze key financial ratios
Buyers will often evaluate your company using key financial ratios, such as the percentage of change in costs over time, your general and administrative (G&A) expenses compared to COGS, and payroll as a percentage of total costs. These ratios give insight into operational efficiency and profitability. Before entering any negotiations, you should review these ratios and make necessary adjustments to improve them.
The role of an outsourced CFO
Preparing for a sale or acquisition can be overwhelming, especially when you’re not a financial expert. That’s where hiring a fractional or outsourced CFO can be invaluable. These professionals bring a wealth of experience and knowledge, helping you clean up your financials and manage the process of selling or merging your company.
An outsourced CFO will:
- Provide a clear financial picture of your business
- Help you with accurate reporting and forecasting
- Advise on strategic financial planning to maximize the sale price
- Assist in negotiations, ensuring you get the best deal
Whether you’re planning to sell your company or just want to be ready for the future, preparing your financials is a critical step. You need clear, accurate, and organized records to give buyers confidence in your company’s value. Don’t wait until the last minute—start cleaning up your financials now. And if the process seems daunting, consider working with a fractional CFO to guide you through it.
You may also be interested in: Five areas where small business owners should seek CPA services outside of tax season
At Financial Solution Advisors, we offer outsourced CFO services designed to meet the needs of companies of all sizes. Whether you’re just starting to think about selling or already preparing for negotiations, we’re here to help. Contact us to schedule a consultation. You may also be interested in: How to finance a small business purchase the smart way