7 Deadly Sins of Selling a Business: 5. The Fifth Deadly Sin—Insufficient Financial Information

Lack of financial information from both the seller and the buyer of a business has the ability to quickly kill a deal. Nothing is more embarassing for the transaction advisor than to get to close the closing table only to find out that the buyer does not have the money to successfully close the deal. Professional transaction advisors typically have extensive experience pre-screening prospective buyers, which may include income verification, disclosures relating to assets, liabilities, and capital available to put into the deal, and/or letters of credit from a lending institution, etc. The pre-screening for financial qualification is important for closing the deal as well as for avoiding wide dissemination of confidential information pertaining to the business to parties who do not have the financial capacity to consummate a transaction or to buyers who are “window shopping.” Just as important the financial information from the buyer is the financial information on the business supplied by the sellers. Higher levels of financial statements for the business give buyers a greater comfort level in the accuracy of the financial formation presented. Obviously, a buyer would have a difficult time accepting claims regarding financial performance of a business if the business owners do not have financial statements and only offer shoeboxes of receipts and other data. Internal statements, though an improvement, are still only information from the seller and may be, in the buyers’ eyes, unreliable. Compiled or reviewed statements prepared by the company’s accountant (hopefully a CPA) are of higher quality and likely give the buyer more confidence in the accuracy of financial reporting. Audited statements, the highest level of financials provided by a business, would likely give the buyer the greatest degree of confidence relative to the accuracy of the financial position and performance being reported. There is, of course, a cost associated with the more detailed financial statement preparation, a financial burden many businesses, particularly small businesses, may forego. The buyer would then match these statements against the company’s tax returns to futher bolster confidence in the financial reporting. Undoubtedly, a buyer would adjust the value of the offer based on the level of financial information provided. In addition, many businesses, particularly small businesses, expense items that are associated with the current owner of the business but not a future owner of the business. For example, the business owner may be paying family members who are not actively involved in the business consulting agreements, expensing personal automobiles, health insurance, trips, meals and entertainment, paying an above market level of rent for the facilities that are owned by their family, etc. In the event a formal valuation is conducted, the business appraiser, in valuing the business, removes these distortions to income based on research and estimates of reasonable adjustments that could be made for a willing buyer and seller. This gives the buyer and seller an objective opinion of value based on reasonable assumptions and expections provided by an independent third party, once again highlighting the benefit of having an independent valuation performed as part fo the process of selling a business.

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