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Are Your Business Financials In Order for Exit?

Every business owner dreams of selling their business one day for a lot of money then retiring with a home on the beach or traveling the world. However, when it comes to actually selling the business, many business owners don’t follow a unified strategy, leaving them confused and frustrated because they realize running a business is much easier than selling it. 

I have an HR consultant that I work with who was on the M&A team for the large company he worked for. He was brought into every company purchase they were about to make along with the company CPA and attorney. Their sole goal was to attempt to find weaknesses in the seller’s business in order to drive the price down.

The HR consultant was looking for weaknesses in the HR portion of the business. But, the CPA was brought in to determine the reliability of the financial statements. How does the company recognize revenue and expenses? Do their operational procedures follow generally accepted accounting principles (GAAP)? Are they consistent and conservative in the accounting practices?  

If they could find a weakness in the financial statements, then they would immediately negotiate to reduce the price. In one instance, the company they were purchasing did not have reviewed or audited financial statements. So, they were relying on the opinion of the seller for their financial statements. The deal did go through, but the seller took a big reduction in the price because of it. 

This seller could have avoided this, if they had decided 3-5 years prior to have either an audited or reviewed financial statement done by a CPA firm independent of the company. Why? For the same reason, when you buy a house and obtain a mortgage, the lender is unwilling to take the buyer’s word for the value, they want an independent opinion of the value before they make the loan. Without it, the mortgage wouldn’t get approved.   

There are two types of financial statements a business owner can obtain to minimize this risk. A review or an audit. In a review, the CPA will: 

  • Conduct a ratio analysis with historical, forecasted, and industry results.

  • Investigate findings that appear to be inconsistent

  • Inquire about the procedures for recording accounting transactions. 

  • Investigate unusual or complex situations that may impact reported results. 

  • Investigate significant transactions occurring near the end of the accounting period. 

If the transaction is large and/or the scope and size of the business is large and complex, an audited financial statement may be required to qualify as reliable. According to Business.com, an audited financial statement contains: 

“a thorough review of each and every item on a financial statement. It also entails internal protocol testing to ensure that money moves about your company in a way that your reports accurately reflect. As such, an audit is proof that your financial statements are fully accurate.” 

Reliable financial statements from a buyer’s point of view means statements that are either reviewed or audited to minimize any attempts to raise the price by the seller. The financial statements should be either reviewed or audited for at least the past 3 years because they buyer may be unwilling to accept just the last year. They want to see a trend.

When it comes to making this decision, please consult your CPA to understand the pros and cons of each. If you’re thinking about selling your business in the next 3-5 years, now would be the time to take steps to put this in place.  

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