Sell a business

Don’t cook the books! Financial areas to address when selling a business

Many business owners don’t manage to sell their business first time – or for as much as they’d hoped – because they fall victim to a number of pitfalls. We want to see you succeed so we’ve been raising awareness of these potential issues through a series of blogs, including How to identify your S.P.O.F.s (single points of failure) if you’re selling a company and How to get your contracts in order before you sell a business.

Selling a business for maximum value involves a fine blend of ingredients and methods: strategic preparation, accurate valuation, targeted marketing to prospective buyers, careful due diligence, and smart negotiation. One thing the recipe for success doesn’t include is cooking the books. Underhand financial practices will devalue your business – or even make it unsaleable.

So, you’ve been approached by a potential acquirer and they’ve asked to see your accounts…

Do you feel confident that you can explain the financials of your business to an acquirer in a way that will not only answer their queries – but also shows off what a hot proposition they’re looking at?

Bad organisation, antiquated or patchy processes, as well as a time, skills or resource deficit; these are all genuine reasons why some business owners find it hard to evidence the current financial state of their business in a comprehensive and compelling way.

Don’t worry! Panic can lead to a temptation to ‘cook the books’ in an attempt make financials appear more attractive to potential buyers – when all that’s really needed is a little guidance, attention to detail, and good preparation.

Areas to address

Honesty always pays. Here’s an idea of which red flags acquirers will be looking out for, so you can compile an accurate set of financials that transparently represent your business and make it more saleable…

Lack of/inadequate accounting, reporting, budgeting and forecasting processes – even if the numbers aren’t consistently strong, robust processes mean your buyer knows exactly where they stand and that there aren’t any hidden issues lurking

Inconsistent data – if one record states one sum, and another something different, your buyer will be confused or even suspicious, so make sure data is consistent across the organisation

Suppressed profits – most buyers will calculate value on the average sustainable profit over a 3-year period so don’t suppress your profits in order to reduce your tax bill because it won’t pay off when you come to sell

Undervalued or overvalued stock and work in progress – get an independent review of your business from an external advisor who can help you evaluate the true worth of your business, taking into consideration ALL value drivers/barriers (physical assets, monetary and otherwise)

Issues with corporation tax, PAYE, and VAT – these could mean future fines or a big bill for the buyer so make sure you can demonstrate there aren’t any gaps by keeping all the filing of returns and payments up to date

Directors’ private expenses running through the business – keep monthly management accounts wherever possible and remove discretionary expenses not related to the company

Undeclared cash payments to the company – absolutely everything must be recorded and accounted for

No investment in auditing – those who audit are viewed by acquirers as more trustworthy (and therefore worth more) so get your books reviewed professionally each year, even if audited statements are not the norm in your industry

Poorly trained or ill-informed accounts staff – whether in-house or outsourced, make sure the people in charge of the books are 100% aware of what’s happening in the business, they’re following all processes, and they can explain discrepancies correctly

As corporate finance experts, we’ve seen all sorts of financial scenarios disrupt or delay a successful sale. If your numbers don’t add up, a buyer might not trust you and is likely to get cold feet. They might even inspect other areas of your business more closely and find other reasons not to buy.

We always advise those who are serious about selling a business to have a ‘dry run’ on the financial due diligence. Ask your accounts team or accountant to prepare fully audited accounts. That way, you’ll be more than ready when the ideal buyer turns up.

Worried your financials won’t stand up to scrutiny from acquirers? Not sure what’s involved in due diligence? Entrepreneurs Hub will give you professional advice on selling a business and help you get exit ready. Sell your business the right way – and for maximum value – in the safe hands of our experts. Contact us in confidence to find out more.

Download your free copy of our popular eBook How to avoid the pitfalls when selling a business and continue to read our blog for more tips and hints.  

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