Introduction
The decision to sell a business often comes with significant financial and emotional considerations. To attract the right buyers and secure the best deal, especially when financing is involved, sellers must present a financially sound and transparent picture. This guide focuses on financial preparedness, drawing from various resources and expert advice to ensure you are well-equipped for the sale process. But first let’s address the first question…
Why Make Your Business Bankable?
Preparing your business for bank financing isn’t just about meeting lender requirements—it’s a game-changer for your exit. By making your deal bankable, you open it up to a larger pool of buyers beyond cash-only bargain-hunters, who often push for the lowest multiples. Buyers using bank money tend to pay higher multiples—think 3-4x or more—boosting your sale price and attracting competitive offers. This approach maximizes your return, speeds up the sale, and ensures a smoother transition, setting both you and the buyer up for success.
Selling a business is a complex process, and ensuring your finances are in order is critical for a successful exit. This note provides a comprehensive guide based on extensive research, covering the top 10 things sellers can do to get their business finance ready. It expands on the key points and includes detailed insights for business owners aiming for an easier and more profitable sale.
Top 10 Steps for Financial Readiness
Below is a detailed list of 10 actions sellers can take, each supported by research and practical insights:
- Prepare Accurate and Up-to-Date Financial Statements
Maintaining accurate balance sheets, income statements, and cash flow statements for at least three years is essential. These documents demonstrate the business’s financial health and stability, which buyers and lenders scrutinize during due diligence. Research suggests that having consistent financials, preferably on an accrual basis, helps show trends in sales, expenses, and profitability How to Sell My Business: 10-Step Guide. - Hire a Third-Party Accounting Firm
Engaging a reputable accounting firm to review or audit your financial statements enhances credibility. Banks and buyers often trust third-party reviews more, as they reduce the risk of bias. This step is particularly important when seeking financing, as lenders appreciate the added assurance of professional validation 7 Steps To Selling Your Small Business. - Manage Add-backs Wisely
Add-backs are adjustments to financial statements to normalize earnings by accounting for expenses like owner’s salary, personal expenses, or one-time costs that won’t continue under new ownership. Research indicates that add-backs can significantly increase EBITDA, potentially adding value (e.g., $100,000 in add-backs at a 6x multiple could add $600,000 to the sale price) Common Add Backs to Consider When Selling a Business | P&N. However, sellers must ensure add-backs are reasonable and justifiable, as buyers and lenders may challenge excessive adjustments. Common categories include discretionary, non-operating, non-recurring, and accounting adjustments, but recurring annual expenses typically don’t qualify Understanding Add-Backs When Selling a Business. - Review and Consider Amending Past Tax Returns
Tax returns are critical for business valuation, often considered more reliable than internal financials. Research suggests that higher reported income on tax returns can lead to a higher valuation, especially when using earnings multiples (e.g., a 4x multiple). However, amending past returns to show more income could trigger a tax event, requiring payment of back taxes and possibly penalties. Sellers must weigh the potential increase in sale price against these costs, consulting tax professionals for advice Tax Returns Trump All in a Business Valuation 2020. The deadline for amending is typically three years from the original filing date, adding urgency to this decision How to File Amended Business Tax Returns | 1-800Accountant. - Plan for Transition
Arranging for a smooth transition by staying involved post-sale can make the business more attractive. Banks and buyers value this, as it reduces risk during the handover period. A transition services agreement, where the seller assists for a set period, can ensure continuity and support, potentially increasing buyer confidence How to Prepare Your Business for Sale | CO- by US Chamber of Commerce. - Organize All Business Records
Keeping financial records organized and easily accessible is crucial for due diligence. This includes contracts, leases, tax returns, and supporting documentation. Organized records streamline the sale process, reducing delays and building trust with buyers Preparing to Sell Your Business: A 7-Step Guide To Be Ready. - Manage Debt
Paying off or managing debts presents a cleaner financial picture, making the business more appealing to buyers. High debt levels can deter buyers or reduce the sale price, so addressing this early is advisable. Research highlights that buyers prefer businesses with lower financial risk, and managing debt aligns with this preference How to Sell Your Business for the Maximum Price. - Resolve Any Contingent Liabilities
Addressing potential legal or financial issues, such as pending lawsuits or unpaid taxes, ensures the business is free from contingent liabilities. This step is crucial for financial readiness, as unresolved issues can scare off buyers or lead to price reductions Tax Aspects of Selling Your Business | Wolters Kluwer. - Get a Professional Valuation
Obtaining a professional valuation helps understand the business’s worth and set a realistic asking price. This involves analyzing financials, market position, and industry trends, often using methods like earnings multiples or discounted cash flow. A valuation from an objective source, such as an accounting firm or business broker, ensures fairness and aids in negotiations What Information Is Needed For a Business Valuation?. - Assemble an Advisor Team
Working with a team of lawyers, accountants, and business broker provides expert guidance through the sale process. Their expertise ensures all financial and legal aspects are handled correctly, from structuring the deal to navigating tax implications. This team approach is recommended for complex transactions to maximize value and minimize risks Council Post: 10 Things To Do Before Selling Your Business.
Additional Considerations
While the above steps focus on financial readiness, it’s worth noting that the decision to amend tax returns or manage add-backs involves trade-offs. For instance, reporting more income on tax returns might increase the sale price but could lead to higher tax liabilities, a complex balance that requires professional advice. Similarly, add-backs must be supported by documentation to avoid disputes during due diligence, as buyers and lenders may challenge excessive adjustments.
An unexpected detail is the impact of transition planning on bank financing. Banks often prefer sellers who stay involved post-sale, as it reduces the perceived risk, potentially leading to better financing terms for the buyer, which indirectly benefits the seller Seller Financing: Guide For Business Owners | LendingTree.
Table: Summary of Key Financial Actions and Their Impact
| Action | Purpose | Impact on Sale |
|---|---|---|
| Prepare Financial Statements | Show financial health and stability | Increases buyer confidence |
| Third-Party Review | Enhance credibility with banks and buyers | Facilitates financing and trust |
| Manage Add-backs | Normalize earnings for valuation | Potentially increases sale price |
| Review Tax Returns | Ensure accurate valuation basis | May increase price, but incurs taxes |
| Plan Transition | Ensure smooth handover | Reduces buyer risk, aids financing |
| Organize Records | Streamline due diligence | Speeds up process, builds trust |
| Manage Debt | Present cleaner financials | Makes business more attractive |
| Resolve Liabilities | Eliminate financial risks | Prevents price reductions |
| Professional Valuation | Set realistic asking price | Aids negotiations, ensures fair value |
| Advisor Team | Expert guidance through sale | Minimizes risks, maximizes value |
This table summarizes the actions and their direct impact, providing a quick reference for sellers.
Conclusion
By following these 10 steps, sellers can significantly enhance their business’s financial readiness, making the sale process smoother and potentially more profitable. Each step addresses a critical aspect of financial preparation, from ensuring accurate records to managing tax implications, ensuring you are well-positioned for a successful exit.
Key Citations:
- How to Sell My Business: 10-Step Guide
- 7 Steps To Selling Your Small Business
- Preparing to Sell Your Business: A 7-Step Guide To Be Ready
- How to Sell a Small Business in 7 Steps
- Tax Aspects of Selling Your Business
- Understanding Add-Backs When Selling a Business
- Council Post: 10 Things To Do Before Selling Your Business
- Common Add Backs to Consider When Selling a Business | P&N
- Tax Returns Trump All in a Business Valuation 2020
- How to File Amended Business Tax Returns | 1-800Accountant
- How to Prepare Your Business for Sale | CO- by US Chamber of Commerce
- How to Sell Your Business for the Maximum Price
- What Information Is Needed For a Business Valuation?
- Seller Financing: Guide For Business Owners | LendingTree