| Many small business owners underestimate the | | | | different parties to the transaction - the buyer, |
| importance of having reliable financial statements | | | | the seller and the financial institution that will be |
| on hand when the time comes to sell a business. | | | | financing the purchase. Banks in Canada are |
| This article will explore some of the main reasons | | | | especially conservative and will insist on valid |
| why you should have several years of | | | | financial information as well as relevant tax |
| accountant-prepared financial statements when | | | | returns in order to pass their credit process. Most |
| you go to sell a business. | | | | banks in Canada will require recent |
| Valuing a Business | | | | accountant-prepared financials (less than 6 months |
| One of the first steps in selling a business is | | | | old ideally) and will absolutely not consider "under |
| coming up with a selling price or a business | | | | the table" cash sales claimed by the owner. The |
| valuation. In order to do so, a business broker or | | | | harsh reality is that even if a buyer and a seller |
| business valuator needs to have a complete | | | | want to proceed with a deal, it could all be a |
| financial picture of the business from which to | | | | moot point if the bank is not in on the deal too. |
| conduct an analysis and form an opinion. Too | | | | Revenue that is claimed increases the valuation of |
| often, business buyers insist that there is | | | | the business |
| unclaimed "cash" in the business. An ethical | | | | Many business owners falsely believe that by |
| business broker or valuator will not take this into | | | | pocketing cash sales that they will be saving |
| account in their valuation as they themselves | | | | money in the long run. The truth is, not claiming |
| cannot validate this money to a prospective | | | | cash revenue may save in the income taxes |
| investor. | | | | payable on that revenue but it is highly illegal and |
| Presenting the business to buyers and due | | | | probably not worth it from a financial perspective |
| diligence | | | | too. Consider an example where a business owner |
| A qualified business buyer will most certainly ask | | | | does not put through $1,000 in revenue. The |
| to review the financial statements of the | | | | business owner may have saved about $200 in |
| company before consummating a transaction. In | | | | taxes payable by doing this. However, from a |
| fact, in the province of Ontario it is law that a | | | | valuation perspective if the business has a 3x |
| buyer must be given financial statements and a | | | | earnings multiple then the owner just shaved off |
| detailed asset list prior to the sale of a business. | | | | about $3,000 in overall business value from their |
| Once presented with the numbers, a buyer will | | | | company by not recording the sales. |
| usually take this information to their accountant | | | | The overall point is that if you are a business |
| for independent validation. An accountant will | | | | owner make a point to have a professional |
| certainly not advise their client to proceed with a | | | | accountant prepare your business financial |
| deal unless the books check out. In other words, | | | | statements every year. Keep all of your personal |
| business buyers need a good set of financials in | | | | expenses distinct from your business too as it |
| order to give a green-light to a deal. | | | | makes the process of selling your business so |
| Getting a bank to approve a loan for a business | | | | much easier. The market to sell a small business is |
| acquisition | | | | already difficult enough without the added burden |
| The sale of a business really involves three | | | | of not having clean books to rely on. |