| If you are considering selling your business here's | | | | having to provide audited statements. Of course |
| some things to consider. Chances are you are | | | | audited statements are the gold standard but |
| going to short change yourself when you sell your | | | | statements prepared by a CPA can often suffice. |
| business unless you follow this advice. If you | | | | If a CPA does not prepare your statements, then |
| bought your business to begin with, there's at | | | | consider having a "review" done by a CPA. A |
| least a 50% chance or better that you didn't | | | | review is an examination using primarily analytical |
| really have all the information you should have. | | | | techniques, and while not the same quality as a |
| Now as you consider selling, you wonder if you | | | | full-blown audit, can often suffice. |
| have the right information for that. Here's a quick | | | | Clearly, the financial statements should be |
| rundown on what you should have. | | | | professional appearing and any item that requires |
| Let's consider for a moment how your business is | | | | more explanation (or detail) should be handled in |
| going to be valued. There are two principle ways | | | | the footnotes to the statements. This usually |
| of doing this. One is based on the income of the | | | | includes the methods of depreciation, amortization |
| business. In a nutshell, the income is capitalized | | | | and lease information even if the lease balance is |
| with some rate that is supposed to reflect the | | | | listed on the balance sheet. There are a number |
| risk involved. The income divided by the rate | | | | of items that can be in the footnotes and |
| yields an approximate value for the business. This | | | | consultation with your CPA is recommended here. |
| is what is known as capitalization and the rate is | | | | Be prepared to open your books to the |
| known as the capitalization rate. | | | | prospective buyer. The buyer may have his |
| The income approach is most often used when | | | | accountant or CPA review your books and pose |
| comparable businesses are not available for | | | | questions. In all cases, be truthful and answer all |
| evaluation against the subject business. | | | | the questions to the best of your ability. |
| The second method is, of course, the comparable | | | | You should consider preparing another document |
| method. In theory it is the same method that real | | | | displaying the breakeven point, and other key |
| estate people use to price a home. The appraiser | | | | financial ratios as compared to your industry |
| looks for businesses that have recently sold and | | | | generally. The breakeven point can be calculated |
| compares them to your business. He adjusts for | | | | on either an income basis or a cash basis, but the |
| differences in the business model, location, | | | | cash basis is usually thought to be the more |
| financing and other factors. Most of this is | | | | useful. The financial ratios should include, at a |
| subjective, but appraisers with reasonable | | | | minimum, the current ratio, the quick (or acid |
| experience can usually get pretty close to a | | | | test) ratio (if you have inventory), a debt ratio |
| market value. | | | | (although that may not be relevant to the sale), |
| With that background, let's look at what you need | | | | and a profitability ratio. |
| to have ready when you go to sell. For the | | | | There are two important items that generally are |
| comparable approach, you should be able to | | | | not presented and both could have a significant |
| provide legal proof of ownership of anything that | | | | impact on the final sales price. The first is an |
| is going to be part of the sale. Certainly, all real | | | | annual budget or profit plan. This is customarily a |
| estate, rights to royalties, franchise fees, other | | | | spreadsheet showing the expectations for the |
| intellectual property, off-site inventories, and | | | | current year. It is sufficiently detailed that |
| equipment. Again, proof for anything that is to be | | | | cross-referencing it to the income statement is |
| sold with the business. Have, at a minimum, copies | | | | usually quite easy. The plan is laid out month by |
| of all those documents. (Keep the originals in a | | | | month and as each month is realized, the actual |
| safe deposit box.) | | | | figures are input next to the plan figures. If |
| If your firm handles or deals with chemicals or | | | | business has progressed as "planned" then the |
| fuels, in particular, you may need to provide | | | | actual figures will be close to the budget figures. |
| assurances that the firm has complied with all | | | | For the buyer, it assures him that the future |
| local, state and federal regulations with regards of | | | | months will likely unfold much like the past |
| hazardous material(s). This is an area that has | | | | months. This has the affect of reducing the |
| caused a tremendous amount of trouble in recent | | | | capitalization rate in the mind of the buyer. The |
| years. Consider for a moment that a buyer is not | | | | lower the capitalization rate, the higher the value |
| going to be anxious to buy an environmental | | | | of the business. |
| problem. If a problem exists, good estimates as | | | | Another document is the marketing plan. This one |
| to the cleanup costs will likely be requested. Just | | | | gets neglected the most, yet if properly done, it |
| be prepared. | | | | is probably the most valuable document you can |
| Another area within contingent liabilities is that of | | | | provide. There is no set template for what it |
| product liabilities. If your company is involved in | | | | should look like, but here are the key elements. |
| litigation currently, then a statement from your | | | | To begin, it should list all the marketing efforts, |
| company attorney outlining the nature of the suit | | | | contact people, advertising agencies, and others |
| and its expected disposition will likely be required. | | | | involved in any of the marketing/sales campaigns |
| Your best approach is pre-emptive, get ahead of | | | | for the last two years. When possible it should |
| the curve and have the information available at | | | | have samples of the advertising, sales letters, |
| the first request. This information, and that of | | | | emails, and/or what have you, which have gone |
| hazardous materials are not areas to hide from | | | | into each campaign. For each campaign, the |
| the prospective buyer. | | | | particular media chosen, samples of the particular |
| For the income approach, you should provide | | | | ads, and the results in lead generation, |
| financial statements. Preferably these should be | | | | conversions, and sales dollars. In the final analysis, |
| audited and not more than one year old with | | | | this shows that your business is not merely a |
| income statement comparisons to the year | | | | clump of assets but rather a money making |
| before. All the statements should be made | | | | machine - and money making machines sell |
| available, although the Statement of Changes in | | | | better, and get higher prices than clumps of |
| Owner Equity will probably never be requested. | | | | assets. |
| However, that means the Balance Sheet, Income | | | | Every sale is different, but this should provide a |
| Statement and Cash Flow Statement will likely be | | | | good starting point for the majority of businesses. |
| requested. | | | | Doing and seeing to the mentioned items should |
| If your statements are not audited but are | | | | assure that you would not inadvertently |
| prepared by a CPA you might get by without | | | | shortchange yourself. |