The Importance of Management Accounts When Selling Your Business
Management Accounts
For an SME business, management accounts are often overlooked because they are seen as unnecessary, expensive and difficult to produce. That may very well be true in the day-to-day running of the business, after all, you have other ways to keep track of performance, such as cash in the bank or monitoring project profitability. But when it comes to selling your business, management accounts can become an extremely useful tool, here’s why…
Surplus Cash
Surplus cash is defined as the amount of cash in the business over and above the amount of cash the business needs to function on a day-to-day basis. Most businesses will have some surplus cash and some will have significant cash reserves. Surplus cash can be useful in normal business operations for paying down debt or investing, but in the world of M&A, surplus cash has other benefits. The expectation for most company sale deals is that they are done on a cash-free, debt-free basis. So, the wonderful thing about surplus cash is that it can usually be extracted from the business tax-efficiently as part of the sale proceeds.
However, the challenge is determining what proportion of the cash in the business is required for working capital and what proportion is, therefore, surplus. This is usually subject to some scrutiny and negotiation during the due diligence phase of a sale. The starting place for this, as the exiting shareholder, is to demonstrate the normal operating cash demands of the business, which is where management accounts come in.
While annual accounts do a good job of showing the cash position at a single point in the year, they don’t demonstrate the natural ebb and flow that most businesses experience throughout the year, especially if the business is particularly seasonal. Additionally, they can be up to 9 months old by the time they are published, whereas management accounts are typically produced within a week or two of the month end.
So there are two crucial things that a set of management accounts will allow you to do:
Demonstrate a normalised cash flow for the business to facilitate the calculation of surplus cash. You need at least 6 months, but ideally 12 months, of management accounts to do this satisfactorily. This will leave very little room for negotiation or doubt when it comes to determining this cash figure.
Acquirers will often ask for up-to-date financials so they can assess the latest position of the company. This is because statutory figures may well be 12 months or more out of date. Having up-to-date management accounts solves this issue, as well as allowing the acquirer to assess trends by seeing results over a longer period.
EOT or other types of funded sale
Employee Ownership Trusts are an increasingly popular option for shareholders looking to exit their business or realise some value from their business asset, the most recent figures suggest more than 2,400 businesses in the UK are now employee-owned. See our EOT article here.
However, the way shareholders are paid out on these deals is with the majority of the consideration coming out of the proceeds of the business over the next few years. It is, therefore, essential that the business can demonstrate the affordability of these payments, which is where management accounts come in.
There are also other ways of funding an acquisition where good management account information will be extremely useful.
Of course, none of this changes the fact that producing management accounts can be costly and time-consuming. But inevitably, it is easier to produce them in real-time than retrospectively, and they will make the due diligence process a lot easier and quicker. In conclusion then, while we wouldn’t necessarily recommend producing management accounts as a matter of course, we would recommend getting into the habit at least six months to a year ahead of selling, or re-financing the business.
Similar Insights
FAQs – Selling Your Company
How do I sell my business in the UK?
Selling a business in the UK typically involves preparing financial information, obtaining a valuation, identifying suitable buyers and negotiating the terms of a sale. Most owners work with an M&A adviser to manage the process confidentially, approach qualified buyers and maximise the value achieved.
At Entrepreneurs Hub, we talk about five key areas that make the difference between success and failure when selling your business. Read more…
What is my business worth?
A business is typically valued by applying a multiple to its sustainable profit, often EBITDA or adjusted net profit. The appropriate multiple depends on factors including growth, recurring revenue, customer concentration, management strength, owner dependency, market conditions and buyer demand.
Determining what your business is worth involves more than applying a simple formula. Use our Business Valuation Calculator to obtain an initial valuation range, or read our simple business valuation guide to understand the factors buyers consider.
How long does it take to sell a business?
Selling a business in the UK typically takes 12 to 18 months from initial preparation to completion, although the formal sale process itself may take around 6 to 9 months once the business is ready to go to market. The exact timeframe depends on factors such as how prepared the business is, buyer demand, the complexity of the transaction, due diligence and how quickly legal and commercial terms can be agreed. Preparing financial information, contracts and other key documents in advance can help reduce delays and make the sale process more efficient. Read our complete business sale timeline to see what happens at each stage.
When is the best time to sell a business?
The best time to sell a business is usually when it is performing strongly, has clear growth potential and you are not under pressure to complete a deal. Buyers are typically more attracted to businesses with stable or rising profits, reliable financial information and credible opportunities for future growth.
You may be in a stronger position to sell when:
- Revenue and profits are growing or consistently strong.
- Financial records are accurate and up to date.
- Future growth opportunities can be clearly demonstrated.
- The business is not overly dependent on you.
- An experienced management team is in place.
- You have prepared for the sale well in advance.
Market conditions can also influence buyer appetite and valuation. Sector growth, access to finance and competition between buyers may support stronger deal activity. However, the performance and sale-readiness of your business are usually more important than trying to identify the perfect month or year to sell.
Ultimately, the right time to sell is when both you and your business are ready, and the company can demonstrate sustainable performance, manageable risk and future value to potential buyers.
Use our Exit Readiness Assessment to assess how prepared your business is.
Do I need an adviser to sell my business?
You are not legally required to use an adviser to sell your business, but many owners appoint an experienced M&A adviser to help manage the process. An adviser can prepare the business for sale, identify and approach suitable buyers confidentially, coordinate negotiations and support the transaction through due diligence.
The right adviser can also help create competitive tension, protect your time and reduce the risk of avoidable mistakes. Read our guide to choosing the right business sale adviser to understand the different types of support available.
How do I prepare my business for sale?
Preparing a business for sale involves strengthening its financial performance, reducing risk and making sure it can operate successfully without heavy reliance on the owner. Buyers will also expect accurate financial records, clear contracts, organised documentation and evidence of future growth.
Preparation should ideally begin well before approaching the market, giving you time to address weaknesses that could affect value or delay the transaction. Use our Exit Readiness Tool to assess how prepared your business currently is.
How is confidentiality protected during a sale?
Confidentiality is protected through controlled information sharing, anonymised buyer approaches and non-disclosure agreements. Potential buyers usually receive limited information at the start of the process and must sign an NDA before commercially sensitive details are released.
Prospective buyers should be assessed before receiving further information, with documents shared gradually according to their level of interest and credibility. A well-managed process also allows the business owner to retain oversight of who is approached and what information is disclosed.
What documents do I need to sell my business?
The documents needed to sell a business commonly include financial accounts, management information, forecasts, customer and supplier contracts, employment records, tax information and evidence of intellectual property ownership.
Buyers may also request details of property, insurance, legal disputes, regulatory matters and company ownership. Organising this information before due diligence begins can reduce delays and help maintain buyer confidence. Our Business Sale Due Diligence Checklist explains the main information buyers are likely to request.
What’s the quickest way to sell a company?
The quickest route is usually a sale to a buyer who already knows your business, such as a competitor, a supplier or your management team, or to a buyer with funds ready. Even then, legal work and due diligence normally take two to three months. Speed usually costs money: with only one buyer at the table there is no competition on price. If timing matters, tell your adviser at the start so the process can be built around it.
Can I sell my business online?
You can list a business on an online marketplace, and for very small businesses this can work. For businesses with a value above around £2m, public listings carry risks: staff, customers and competitors may spot the sale, and the buyers who respond are rarely the best fit. A managed process that approaches selected buyers confidentially usually produces stronger offers and protects the business while it is for sale.
How can I increase the value of my business before selling?
You may be able to increase the value of your business by improving sustainable profits, developing recurring revenue and reducing reliance on individual customers or the owner. Buyers also value capable management teams, reliable financial reporting, scalable operations and clear opportunities for future growth.
The earlier you identify the factors affecting value, the more time you have to make meaningful improvements. Use our Business Valuation Calculator for an initial indication of value and our Exit Readiness Tool to identify areas that may need attention.