Successful business owners focus their energy on creating profitable companies, and rightly so. Not overspending on functions like finance and accounting is often viewed as an appropriate way to streamline costs and increase the value of the company over time. However, when selling a business, it is critical to be well resourced and organized as you will need to prepare financial information and respond quickly and thoughtfully to questions from both the advisory firm handling the sale of the company as well as those of potential buyers.

Preparing for a sale requires time and planning. If you are contemplating a sale, the following are four specific financial elements buyers are looking for before making an offer to buy a company: financial statements, add-back normalization schedules, quality of earnings (Q of E) analysis, and management-prepared forecasts.

Financial Statements

  1. Do you keep cash or accrual-based financials? Buyers will prefer accrual-based financials.
  2. Have you ever exported your financial statements to Excel? Buyers will want financials in Excel documents.
  3. If your company is made up of multiple entities, have you ever produced consolidated statements (accounting for intercompany dynamics)? Most buyers seek consolidated statements.
  4. Are you able to produce interim, monthly financial statements? Most buyers seek monthly statements (often for the last 24 months).
  5. Are your company’s financial statements CPA-reviewed or audited? In addition to internal financials in Excel, buyers will want (and value) CPA-reviewed or audited financial statements.

Buyers look for companies with well-organized, software-generated financials. If a seller is unable to produce high-quality statements, this lack of financial transparency and ability to answer financial questions will potentially result in a lower offer.

Add-Back or Normalization Schedules

To understand a company’s operating cash flow, buyers are commonly focused on earnings before interest, taxes, depreciation, and amortization (EBITDA). Buyers will calculate EBITDA using income statement data of recent historical periods as well as data from the trailing twelve-month (TTM) period. However, one-time or non-recuring expenses (expenses which do not reflect core operations or cash flows of the business) may qualify as add-backs or normalizations to EBITDA. Accounting for these add-backs yields an Adjusted EBITDA, which is often higher in value than EBITDA. Adjusted EBITDA is the key metric upon which sale valuewill be based.

Quality of Earnings (Q of E) Analysis

Because of the importance of Adjusted EBITDA, defending its value across recent historical periods could be a significant part of the deal. The main purpose of a Q of E is to conceptually validate and quantify each proposed add-back to EBITDA across each historical period. Should your company present an Adjusted EBITDA that is not materially different than EBITDA (when adjustments are less than 5-10% of EBITDA), a Q of E analysis could be less necessary/applicable. However, to bolster its defensibility with buyers, this analysis is ideally performed by a regionally- or nationally-recognized accountant.

Management-Prepared Forecasts

In addition to the current- or next-year’s budget, the company’s finance team will need to produce a multi-year forecast – ideally for the next 5 years. Because nobody knows the company and industry better than the owner, he or she should provide input into its construction and refinement. The owner and finance team should account for new products, customers, geographies, lines of business, etc. – as well as new corresponding costs – as defensible and as appropriate. Finally, growth is the other key metric upon which sale value will be based.

What Resources are Available to Help Me Prepare Accordingly?

Analyzing a range of considerations pertaining to value, current market dynamics, liquidity needs, tax planning, and any qualitative objectives you would like to achieve in a sale process are also factors owners need to consider. Working with a team of economic experts like ITR Economics can further bolster a company’s forecasts and growth plans prior to a sale. When you’re ready to sell, picking the right advisor is the most important decision an owner can make. A seller should find an advisor that appreciates and recognizes that upfront organization is the key to moving more quickly through the M&A process to execution. Time kills deals, and the less time spent in process, the lower the execution risk. Sufficient preparation combined with a high-quality advisor will help you avoid pitfalls.

If You are Considering a Sale

One of the services we provide to business owners is a complimentary feasibility analysis study. This free service helps sellers learn more about the structure and the results for shareholders as well as the potential outcome for management and employees if you were to sell your business to private equity, a strategic buyer, or into an ESOP structure. As you weigh your options, this complimentary analysis will help you and your team see the benefits associated with each transaction type, as well as our insights into current market dynamics.

ADDITIONAL RESOURCES