Gain a competitive edge by understanding how financial reports prepared for business sale can maximize value and ensure a smooth transaction process.
At Lazear, we guide sellers, and often their CFO or finance lead, through each stage of an exit transaction. Preparation is critical to the success of any major event, and the sale of a business is certainly no exception. This includes early phases of a transaction when data is gathered and analyzed to set the stage for a smooth sale. Financial reporting plays a pivotal role in the process.
Why Are Financial Statements Important to a Business?
We’ve all heard the adage “the numbers don’t lie”, and while this is true, the story that they tell is best understood when accompanied by insight on the surrounding business context. Digging a few feet deeper on your business financials to learn your numbers more intimately and collect data that supports the story of what makes the business exceptional can pay significant dividends in both unlocking value and increasing efficiency in the deal process.
Below is a brief guide to help you prepare for what financial documents are needed to sell a business.
Historical Financial Statements
Ideally, the company will provide a minimum of five years of historical business financial statements, including:
- Profit & loss
- Balance sheets
- Cash flow statements
- Stockholder/member’s equity statements to prospective buyers
As we noted earlier, “the numbers don’t lie,” but only to the extent the company’s statements are complete, accurate, and prepared consistently.
Tips for Improving Statement Quality
- Consider obtaining greater levels of assurance on financial statement reporting by engaging with your CPA early in the transaction planning process.
- For companies with only internally prepared financial statements, consider upgrading to a compilation or review.
- For companies with financial statement reviews, discuss with your transaction advisor if a financial statement audit would materially improve the terms of your transaction or your chances of obtaining competitive financing terms.
Projected Financial Statements
No one has a crystal ball, but the reality is that a buyer is purchasing the future cash flows of the business, not the past, and therefore, projected financial information is critical to a transaction.
Typically, five years of forward-looking projected statements are requested. The good news is that projections can’t and won’t be perfect, but instead need to be reasonable and prepared in good faith based on the company’s expectations and knowledge of the business. If projected financial statements or annual budgeting is not part of the company’s normal practice, discuss this early with your CPA and transaction advisor, and consider the following starting points for a projected profit & loss statement:
How to Build Projections
- Review historical sales growth and assess if it’s likely to continue.
- Factor in new products or service capabilities that you expect to contribute to future sales growth, or retiring low-margin products/services.
- Analyze how product or service pricing inflates over time, whether in line with general market inflation or governed by long-term agreements or other factors.
- Analyze gross margins and how vendor or labor shifts may impact them.
- Evaluate selling, general and administrative expenses and their relationship to sales growth and inflation.
- Plan for future capital needs, separating maintenance vs. growth investments.
Key Performance Indicators (“KPIs”)
Every business has keys to success, and often these can be measured in a financial ratio or metric. Consider making a list of the keys to the business and what reporting and data are available.
Start with foundational metrics such as sales units by product or service line, sales, or profitability by customer or geography. To the extent you have the ability to compare these metrics to industry averages or peer group metrics, this can help drive the argument for value of the Company. Consult with your transaction advisor to consider other opportunities to demonstrate performance metrics that drive value.
Monthly Reporting
Prospective buyers will expect interim financial reports to be made available. For many companies that historically report quarterly, preparing to shift to monthly reporting can significantly aid in the transaction process. Ensuring accurate monthly reporting can facilitate fair and accurate negotiations relating to the company’s normalized working capital and can help explain seasonal changes in the business and balance sheet accounts.
Partnering with a Transaction Advisor
Engaging a transaction advisor who can work hand-in-hand with the Company’s internal and external finance professionals to collect and review financial data can improve the overall outcome of a transaction. When reporting is consistent and reliable, buyers gain greater comfort in the data being presented, and the sell-side can more seamlessly advocate for full and fair value.
At Lazear, with a team boasting numerous CPA professionals, we are here to assist with these critical early steps in transaction planning. Contact us for more information.
Stephen Hilborn, Director
Stephen is a Director with the firm’s Mergers & Acquisitions and ESOP advisory practices. Stephen takes pride in serving his client’s needs and maximizing value for sellers and their enterprises.
His prior experience includes serving publicly traded and private middle-market clients as an external auditor and more recently serving as a leader on the financial planning & analysis team of a large private aviation company. He also holds experience in technical accounting research, enterprise budgeting/forecasting, financial modeling, collective bargaining, and corporate development.
