“Recasting” financials before selling a company always raises eyebrows for those that have not heard the term before. However, just as home-owners “stage” their house before putting them on the market, you will want to legally dress up your business. You certainly can work to improve its appearance physically, and you also should financially. After all, those numbers will be a crucial element of setting the value of your business.
To begin with, your accounting policies must follow accepted industry standards. This may seem obvious, but business owners sometimes get lax. Be aware, however, that potential buyers will request audited financial statements showing income, expenses, and tax returns for the past three years. Tax computations must be current. If placing your business for sale in the middle of your fiscal year, prepare interim financial statements.
Understandably, a potential buyer will ask who prepared your financial statements and will prefer the opinion of outside professional accountants over that of an internal CFO or controller. Any financing institution a buyer approaches also will require audited financial statements. Therefore, it is essential to prepare them early.
In preparing a business for sale, it’s customary to recast historical financial statements so as better to display prospects of its future performance for a new owner. “Recasting” financials doesn’t mean jiggering the books. Rather, it means acknowledging that you probably operated in a way that minimized taxes. This is sometimes called ‘the owner’s benefit.’
For example, you may have awarded perks and benefits to yourself and to family members, accelerated depreciation, or reinvested profits in capital improvements. These kinds of actions legally benefitted your business—from a tax standpoint and otherwise—during your ownership, but they don’t accurately portray your company’s profitability and opportunity for a new owner. Any potential buyer will want to see that owner’s benefit removed so they can see the true business profitability. In the past you sought to reduce profits to keep taxes low. Now you need to increase them to show a new owner what the true history and potential of the business is.
To portray your firm’s actual potential and make it more attractive to buyers, recast financial statements to remove their effects and adjust your income statement to present what would have been real, operational cash flow. For example, re-report your salary and family members’ salary to approximate current market salary levels. Expenses such as intercompany rentals, travel and entertainment, and club dues are candidates for recasting. An accountant can help identify and resolve these matters, as can your investment banker, especially if your sale is imminent.
Before recasting financials, however, be aware that getting a history of clean financials may take several years, and that some buyers accept only original financials. You should have them available and be able to demonstrate adequate financial systems and controls.
Although it takes time, don’t underestimate the impact recasting financials will have on how your business value is perceived. It is time well spent when selling a company. Showcase your business as attractively as possible to attract the buyers you have targeted.
I invite you to use these ideas as you start the journey to sell a business.
Tags: exit planning, exit strategy, sell a business, sell a company, selling a business, selling a company