As we work with business owners seeking to sell their company, we find that many companies are not prepared to achieve peak value.
In order to prepare a business for an optimal sale, some activities are challenging and some are far easier. This article is about one of the easiest ways to enhance your company’s value and salability.
Financial reporting is simple, but it has a large impact on the value and salability of a company. The format and credibility of your financial reports makes a big difference to buyers, without even considering the numbers in the reports.
Private companies are not required to report to outside investors, so they are often comfortable operating with internally generated financial statements. But, when it comes to a sale, you are trying to attract a sophisticated investor, not unlike a public company. Just as investors in public companies require clean, accurate, and independent financial reporting, so an investor in a private company wants the same thing.
Why is this so important? Everything you can do to increase buyer confidence and lower risk is beneficial. Buyers discount valuations based on questionable financial data.
You may have the highest of confidence in your financial statements, but buyers do not share your familiarity with your company.
If it would help a buyer to write you the largest possible check, would you do whatever it takes to make them to achieve rock-solid confidence in your company’s performance? Then let’s discuss exactly how you can achieve that.
Here are three ways to accomplish this.
- Reviewed or Audited financials. As a first step, audited financials can be a great move. Plan to invest $3,000-$20,000 per year, although it depends on the complexity on the company.
- Get a Quality of Earnings (QOE) report. As opposed to an audit, a quality of earnings report focuses on EBITDA (earnings before interest, taxes, depreciation, and amortization) and working capital. The QOE report identifies the impact of adjustments to provide the clearest picture of actual earnings.
- Hire CFO/Controller. This depends on your company. Most businesses in the lower middle market already have one in place, because they provide the financial advice they need to make the best decisions. It is beneficial when a buyer perceives that the CFO’s role contributes to the company’s strong financial position.
As a final point, you differentiate your company with higher quality financial statements, because many businesses in the lower middle-market decide not to go that route. Staying with internal financials is an option, as long as they understand the benefits they are missing in the short-term, and more importantly, the long-term benefit of higher confidence and potentially a higher sale price.
Ultimately, whether you want to pursue better and cleaner financial statements is your decision. But the question I ask is: How do you want to be viewed by buyers?