When an investor makes a decision to buy a business, the focus in almost every instance is on the business's future financial performance. Accordingly, an owner who has decided to sell a business must ensure that the historic and current financial performance of the business can be represented and explained in a clear, concise, and complete manner to potential investors. Before initiating any sale process, the owner should engage with the company's senior internal financial officer (or team), and the outside accountants for the business, to determine whether anything needs to be done in order to achieve that objective.
Some of the most important considerations when addressing a potential investor’s concerns and expectations are as follows:
Audited Financials. It is not necessary to have audited financial statements in order to sell a business. But it helps. A lot. Accordingly, if the business does not already have audited financial statements, consideration should be given to whether obtaining them would be appropriate under the circumstances (including in light of the time and expense involved in obtaining them). If a decision is made to stay with unaudited financial statements, it is important to understand and be prepared to explain whether and how the financial statements vary from generally accepted accounting principles.
Monthly Reports. As a sale process moves forward, potential investors will expect to receive periodic statements regarding the business's ongoing financial performance. Ordinarily that will involve monthly and year-to-date reports delivered promptly after the end of each calendar month. Accordingly, it is important to ensure that all internal and external functions necessary to prepare such reports are ready and able to deliver on that expectation to the extent possible.
Adjustments. When representing the financial condition of the business to potential investors, it is important to consider adjustments from historic practices that are appropriate to provide the investor with an understanding of how the business will perform in the investor's hands. This often involves adjustments for off-market expenses historically incurred by the business (for example, personal expenditures of owners or below-market rent for property owned by affiliates). Additionally, other adjustments that historically have been made only annually may need to be made periodically in order to prepare the above referenced monthly reports expected by potential investors.
Many other items need to be considered when getting the financial house of a business in order in preparation for a sale process. The most important thing is for the owner to proactively get together with the financial and accounting team for the business in order to ensure that everyone will be prepared to deliver during the process.