Blog Post

The Crucial Role of Financials in Selling Your Business

  • Date Posted: February 29, 2024

Business owners can proactively ready themselves for a business valuation when aiming to sell their business and demonstrate its worth to potential buyers. A critical step for sellers is to provide clean and accurate financials. Clear financials are crucial for buyers to assess the business’s value, offering them assurance and understanding throughout the buying process. 

Ideally, sellers should begin looking at their financials with a broker at least three to five years before they want to sell, said Kyra Gibson Brzytwa, whose firm Exit Equity provides business brokerage services to privately held companies from $1 million to $55 million in revenue.  

“I tell clients when I meet with them for the first time: It is about financials, financials, financials,” she said. “If we’re getting ready early enough, we can have that conversation about value. If the financials don’t indicate an exit price in the seller’s ballpark, we can create an action list together.”  

To affect a higher price, sellers should focus on clean – organized, consistent, readable – financials, which also provide a clearer view of opportunities for add-backs – expenses not inherent to the operation of the business – which can improve its cash flow, she explained.  

“About 90% of the valuation is reliant on your financials and how they tie to your tax returns,” Gibson Brzytwa explained. “We should work through discretionary spending items to show true cash flow. By the time the buyer and the bank see it, it should look like the business has it act together.”  

She explained that with an early start, owners can also make the business more marketable by establishing processes and delegating to move themselves out of the day-to-day. For some, that means hiring a salesperson, or training up a manager.   

Debbie Webber, Vice President and Relationship Manager at Coastal Community Bank, advised that lenders also recommend sellers focus on their financials early.  

According to Webber, the way financial information is presented can restrict the financing choices available to potential buyers. If the business does not have room between cash flow and expenses for financing, financing from banks or the U.S. Small Business Administration (SBA) can become off the table – leaving the business with only the available pool of cash buyers. 

In the process of evaluating a business, brokers typically collect financial records spanning five years, while lenders typically require financial data covering three years. This includes profit and loss statements, balance sheets, accounts receivable, accounts payable, work in progress, tax returns, and an inventory of assets. 

Checklist: Are my financials: 

  • Complete? 
  • Clean? 
  • Consistent? 
  • Organized? 
  • Available in Digital Form?  

Owners and managers should find an expert to help them prepare their financials and market their business. Our guide Selling for Optimal Value: How to Prepare Your Business for Sale provides guidance for each of the following six areas to help prepare a business for showings: 

  • Marketability 
  • Financials 
  • Broker Relationship 
  • Financing 
  • Contracts 
  • Finding a Match 

 Get the Guide