If you have decided to sell your business and eventually get to the stage where a prospective buyer is interested enough to start the due diligence process, the financial performance of the company comes to center stage. Aside from the myriad components of a successful sale, the Profit and Loss report, the Balance Sheet report, cash flow and metrics specific to the business will make or break the deal. It does not matter if the business is otherwise very attractive, or the location is great or the product or service is hot in the present market. The numbers are everything. The numbers must make sense and they must be verifiable, since they provide the basis to a potential buyer of a viable successful purchase going forward.

Business financials: you are not thinking about selling yet

More often than not, a small business owner dedicates most of his/her daily time to running the operation. And as important as it is, keeping up with financial performance is relegated to the end of things to do – and unfortunately, too many owners simply loathe that chore. With a few exceptions, owners will work on financials when the time comes for tax filings, because… well, they have no choice. Some owners have a business budget, some do not. The classic approach to daily operations is of course to keep the expenses down and the profit up. When it comes to tax time, the thinking is more along the lines of showing as much expenses as possible to minimize taxable income. This is a general statement; it most certainly does not apply to you.

Business financials: you are considering a sale

Now you are considering the sale of your business. And among the many things you have to gather in order to prepare the business for a sale, the most important is to have at a minimum (usually) three years of business tax returns and Year-To-Date Profit & Loss statements. Not surprisingly, prospective buyers are interested in buying businesses that make money. Virtually no one (except in the world of asset sales) is interested in a company that has a poor financial record.

Prove it

You get the idea. Any diligent buyer will request financials that can be proven to be accurate. Financial reports can be confirmed by bank statements, credit card merchant statements, deposit records and whatever else might be relevant. More business deals have failed at the last minute because discrepancies in the financials cannot be reconciled.

A comment about recasting

Recasting refers to the process where a tax return or a Profit & Loss statement is adjusted for personal expenses that show as a business expense, or where an expense might not be applicable (owner’s payroll or relatives in payroll are fairly common.)

Bottom line, there is a way to present the financials accurately to show true numbers even if some personal and business expenses are listed in the reports. Recasting is by itself a whole subject to discuss; I will address it in a later blog.