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Considering a Sale? Financial Reporting Matters

Posted on April 20, 2022 by

Tim Hilligoss

Tim Hilligoss

Ben Smith

Ben Smith

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Having the right financial statements in place is vital for many reasons, but especially when you may be considering the potential sale of your business. When it comes to financial reporting, buyers and sellers frequently have different priorities in mind so they may be looking for different things when reviewing financials. 

The challenge is that many sellers do not have the right financial statements in place. 

One reason for this is that sellers tend to look at the budgets of their individual projects or accounts rather than at the overall health of the company. One can understand the appeal of this approach. In the view of many business owners, if they can see that each project is profitable at the granular level, then they feel comfortable that the business is profitable as a whole. 

Buyers, on the other hand, are unlikely to sift through individual projects or account documentation at first. What buyers are looking for is a big picture perspective on how the company is doing. The right financial statements give them a complete view of important financial health patterns like revenue, margins, receivables, overhead expenses, and overall cash management. 

This is why accurate financial statements are so important. They provide objective evidence of the fundamentals of your business in terms that buyers understand. Your financial records should make it easy for a potential buyer to not only trust your last few years of reporting, but also to make a reliable forecast on where the business may take them in the years ahead. 

Consider this hypothetical illustration from the industrial automation sector on how this difference in perspective could play out in the real world. 

Suppose that an industrial automation company programs a robot to perform a specified task. From the seller perspective, we might simplistically compare dollars out on the bare metal cost of the robot with dollars in on work delivered using the robot and be satisfied that we have basic profitability at the project level, having earned more than we spent. 

From the buyer’s perspective, complete financial statements can tell a very different story. Looking beyond the granular transaction level, financial reporting can reveal that the programming you invested in the robot has increased its base value. The robot itself (and not just the direct book of business it may enable) can be sold for more because you are able to show evidence of the increased value in accurate financial records. 

In general, buyers will want to see at least three years of detailed financial records. Make sure you’re getting thorough and professional accounting advice that encompasses the way you record accounts receivable, accounts payable, inventory, and that all of this information tracks accurately to your tax and bank records. 

Keep in mind that while reducing your tax bill can be a reasonable goal for a seller, it can be overdone. Suppressing too much of your profit (through owner expenses, for example) to save tax dollars can significantly reduce the objective value of your business. A buyer wants confidence that the seller has managed the tax burden of the business in a balanced way and this evidence will show up in properly developed financial statements. 

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We help business owners like you increase profitability, optimize tax strategies, implement succession planning, and gain advantages in mergers and acquisitions. We invite you to contact us to discuss your individual situation. 

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Tim Hilligoss

Shareholder, Tax & Assurance

As a trusted advisor, Tim guides clients through business transactions, tax issues and international expansion.

Ben Smith

Shareholder, Consulting

Ben leads the firm’s consulting group, helping middle-market clients optimize results through transaction services and digital advisory support.

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