Getting Your Financial House In Order

The entire sale process is highly complex, with its success hinging on multiple factors. However, you will not achieve a satisfactory exit if your financial house is not well-prepared for the sale process. The importance of having your financial house in order is paramount from the very beginning of any engagement.

Prospective buyers will meticulously scrutinize the initial financial information provided to assess whether the opportunity is worth their time and resources. If the prospective acquirer decides to proceed, the significance of a strong financial foundation becomes even more critical. From meeting outlined financial projections to successfully navigating the due diligence process, a deal will not be finalized unless your business has a solid financial profile.

Here are some of the key recommendations to take to ensure your financial house is ready before contemplating and entering the sale process.

Reviewed Financial Statements

Having your financial statements reviewed by a third party, such as an accountant, auditor, consultant, or investment bank, can be highly beneficial when preparing to sell your business. Reviewed financial statements provide a comprehensive understanding of your company’s financial and operational structure, which is valuable for making informed business decisions, such as expanding into new markets or preparing a budget for the next fiscal year. While not necessary, having your financials reviewed adds a layer of credibility and reliability that prospective buyers appreciate. If you don’t have reviewed or even audited financial statements, it will not prevent you from selling the business, but it will certainly provide additional comfort to the buyer surrounding your financial controls. This assurance can also be important whether you are securing a loan, obtaining an industry-standard certification, or selling a stake in the business. Ensuring your financials are accurate and well-organized through a third-party review will contribute to a smooth transaction process.

Financial Leadership

While a Chief Financial Officer (CFO) is not a requirement for all businesses, having a designated financial executive or controller can be critical, especially as the company grows. This role can also be fulfilled on an outsourced basis, providing flexibility for smaller companies. A dedicated financial leader ensures your financial house is in order by maintaining accurate records, overseeing financial planning, and managing risks. Additionally, they can play a crucial role in other business functions, such as contract negotiations, and be a key member of your potential sales team during an M&A deal process. By having a competent financial executive, you demonstrate to potential acquirers that your business is well-managed and financially sound, thereby enhancing the credibility and attractiveness of your company during a potential sale.

Internal Forecasted Financials

Having detailed financial projections based on thorough assumptions, such as the prospect pipeline or separate budgets for different departments, is a key aspect of getting your financial house in order. Not only do these projections enable you to make informed financial decisions, but they are also crucial for prospective buyers. Acquirers prefer to see realistic financial projections and assess how well the company has performed against them. This allows them to make a confident and realistic offer. Prospective buyers also examine projected financials to understand how the business will perform immediately post-closing under new ownership and how effectively they will be able to utilize cash flows to execute their strategic investment rationale behind the acquisition.

Documents, Contracts, and Agreements

An often-underestimated factor is having key materials such as documents, contracts, and agreements in order, as this directly impacts the organization of your financial information. This becomes especially critical during the due diligence phase of the sale process, where prospective buyers scrutinize the business, they are considering acquiring. Organizing your customer and vendor contracts, lease agreements, employee agreements, bank statements, and insurance policies ensures clarity and enhances confidence in the transaction.

Clear documentation is essential not only for day-to-day operations but also during any sales process, particularly for the Quality of Earnings (QoE) assessment. This assessment verifies earnings accuracy by adjusting financial statements to reflect the true operational performance of the business. Detailed contracts and agreements provide valuable insights into revenue, liabilities, and operational risks, which are essential for validating financial claims and structuring deals effectively. Meticulous record-keeping promotes transparency, builds trust, and supports successful transactions.

Clean Financial Statements

It’s not uncommon for business owners to run certain personal expenses through the business and then adjust them when a prospective buyer assesses the business’s value. However, the golden rule in any transaction is that cleaner financial statements result in a higher potential value that an acquirer can credibly see in the business. To clean up your financial statements and get your financial house in order, take several steps before any sale process.

First, limit the amount of personal expenses running through the income statement, as these can sometimes be difficult for the buyer to fully accept. For example, it is advisable to pay yourself an industry-standard salary and distribute any excess profits rather than paying yourself a high salary that will need to be adjusted out. Next, focus on maintaining a healthy balance sheet. This includes eliminating personal or intercompany loans used to fund your projects and cleaning up the capital structure of the company by buying out small shareholders not actively involved in the business. These steps will increase the value of your business rather than detract from it.

Having your financial house in order is just one of many steps that can significantly increase your chances of achieving a successful exit outcome. As with other critical aspects, the earlier you get your financials in order and start preparing for a successful exit strategy, the better it will better it will be for both you and prospective acquirers. Corporate Advisory Solutions is here to assist you in this preparation, helping to minimize any downside risks in the typically complex and demanding sale process. Explore our M&A Exit Prep and other services to learn how Corporate Advisory Solutions can help you prepare for a successful M&A transaction, maximizing value and securing your future. Engage with us today to leverage our expertise and ensure you are ready to meet the market’s demands.