So, you’ve invested wisely, and put in the “sweat equity” over the years, to build a successful business. Now it’s time to evaluate your options for an exit strategy, to understand the answer to the question “can I sell my business and have it be a profitable transaction?”
When thinking about your exit strategy options, there is an important advanced decision making process that needs to take place. This process has the potential to increase your total return, and it should without a doubt include, investing in a financial statement audit. This key piece is often overlooked, at the detriment to many business owners.
Recently, I sat down to have lunch with a colleague who works on the legal side of exit strategy transactions. I asked whether they had ever participated in a deal that did not include audited financial statements in the due diligence process. To paraphrase their answer: “No, I really haven’t. Every deal we’ve done has included an audit, and it’s not likely that a client would proceed without one.” Now, the caveat with this statement is that these deals generally involve companies with revenues in excess of $10 million.
A potential buyer’s degree of uncertainty as to the financial condition and future prospects of the target business, will substantially influence their offer price and negotiating strategy.
Naturally, a buyer’s due diligence will:
- Analyze the quality and trends in prior year revenues, expenses and net cash flows.
- Project out into the future based on historical information.
From the buyer’s perspective, a primary benefit of using audited financials is that they reduce the underlying uncertainty as to the consistency and integrity of the financials. Throughout the process, the buyer can obtain a deeper understanding of the competitive dynamics, internal control environment, and legal context the present business operates under. By enhancing the buyer’s access to this verified information, a seller should expect a higher valuation and quicker time to close!
Also, be aware that the quality of the accounting firm is also an important consideration. I would highly suggest using an accounting firm that is known by prominent attorneys and bankers in the community. This is not a time to “go cheap” on professional service advisors.
In the unfortunate event that the deal is postponed or falls through, a financial statement audit will yield immediate benefits to the seller as well. By working closely with experienced business and tax advisors, who offer a comprehensive audit approach, fresh ideas will be generated, and insights into improving your businesses’ top- and bottom-line will be a top priority. You will be free to queue up the next deal opportunity, rather than worrying about the financial statements. .
As you prepare for the eventual sale or generational transfer of your business, we would love to talk with you further, to learn more about you and the needs of your business. You can reach out to us anytime on our website, email me at [email protected], or call us at 585.546.1840.
