When you decide to sell your business, you’ll hear a lot of advice, which often includes “you need clean financials for a business sale”. You may think this is having a good accountant who files everything on time, submitting your annual accounts on time, having your VAT up to date, and nothing outstanding with HMRC.
Yes, these are important, but there’s more to it than this.
Clean financials aren’t just accurate numbers, they’re numbers that tell a clear, story about the business. These also need to hold up to scrutiny, when someone who doesn’t know you, has no reason to trust you yet, and is looking for reasons to reduce their offer, starts to go through them line by line.
This is very different than what most owners are used to, and the reason needs to be understood before you find yourself in a due diligence process, wishing you’d got things sorted out earlier.
The story behind the numbers
Every movement in your financials needs an explanation, and you need to be able to provides it, with context, before the buyer finds it.
A year where the revenue dipped, a supplier cost that spiked, or a margin that moved. These things happen in every business and they are expected. A buyer is looking to see if you can explain it clearly and if the reason makes sense.
If you say “revenue dropped in 2022, because we lost a big contract in March and we decided not to replace it until we restructured the delivery team”, this shows you know what happened and can explain why. This is very different to an owner who says “I’m not sure, it was just a difficult year.” Both may have gone through the same thing, but one of them has a business a buyer trusts.
The story behind the numbers can be as important as the numbers themselves. Preparing clean financials for a business sale gives you this.
Add-Backs: The area that trips most owners up
An add-back is a cost that gets adjusted when working out the profitability of the business. Examples of this include owner salary above a market rate, owner pension contributions, one-off costs that won’t recur, personal benefits run through the business, or costs related to a specific project that has now ended.
These are entirely normal and most companies have them. A buyer will expect to see them, but an issue arises if they’re not documented, not explained, and not shown clearly. If a buyer has to discover the add-backs, it creates doubt. If you present them at the start, it shows that you understand your own business, are in control of it, and have nothing to hide.
Having a conversation on add-backs can improve the EBITDA figure that an offer is based on. But, if it’s handled badly, it can erode trust at a key moment. This is an area where having an adviser who has been through the process before, can make a real difference.
Can your business run without you?
Take the Business Dependency Test.
It takes less than 3 minutes and will give you a clear answer.
The Monthly Management Pack
Start to produce a monthly management pack that shows revenue, gross margin, EBITDA, and cash in the bank. Four numbers, with a short note on anything that needs explaining. This needs to produced every month, in the same format.
If you can read and explain it to someone else in under five minutes, it’s working. If you find yourself needing to qualify everything, or apologise for the way things are presented, it needs to be made simpler.
If this pack is produced consistently over two or three years, it then becomes one of the most valuable documents in a sale process. It shows a buyer that the business has been managed with care and shows that the numbers can be trusted. It also shows that you know your business, which is vital in the early starges, when trust is being established.
The financial reporting point in How To Document Business Systems, where financial reporting is listed as one of the five areas that must be prioritised. It’s on that list because it takes time to build a history of consistent reports. If you start doing this two years before a sale, you have two years of clean data. If you start six months before, it gives you almost nothing and does not show any seasonal revenue or expenses.
Clean financials give you confidence
When you know and understand your numbers, every conversation you have becomes much easier. This applies to conversation with banks, business advisers, potential business partners, and anyone who might want to invest in the business.
Most owners who go through the process of cleaning up their financial reports will describe the same experience: they can make better decisions because they start to see the business clearly. Customers they thought were profitable turn out not to be. Costs they hadn’t noticed, stand out. Numbers that were previously hidden, start to tell a story.
That has value well before a buyer enters the picture. What Buyers Look For In A Business covers how financials sit alongside the other things a buyer looks at, and Is It Too Late To Sell My Business shows what you can do, if timing is a concern.
Could you talk someone through your numbers, in ten minutes and have them trust you and the business at the end of it?
Everything on that list is buildable
Recurring revenue can be developed, leadership teams can be built up, client concentration can be reduced over time, your systems can be documented, and the financial records can be cleaned up and presented clearly.
But none of that can be done overnight, and none of it’s possible without a focused effort. For most businesses, it’s not about making dramatic changes, but about making s series of improvements, over a realistic timeframe. How To Document Business Systems covers the practical areas to focus on and the order that makes the most sense.
Time is the key component here. If you start two or three years before you want to exit, this is not hard to do. However, if you start six months before you want to sell, then your options are limited. The owners who get the best outcomes are the ones who started thinking about this earlier than they felt was necessary.
Now you know what buyers look for in a business, what would they see in yours?