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Business owners often ask what they can do to maximize the value of their business if they would like to sell it in the future.

Preparing for transition

How to Prepare for Financial Due Diligence

  • 10/2/2013

Business owners often ask what they can do to maximize the value of their business if they would like to sell it in the future. A potential buyer’s due diligence will include a rigorous analysis of your business, focusing on accounting, legal, marketing, and other technical areas. The sale can be burdensome and complicated, as the buyer attempts to understand your life-long efforts in a few weeks or months.

The good news is there are many things you can do now to prepare for the transaction. By thoughtfully presenting your business, you can capture the value you have created, which may result in a higher sale price.

The tips below will help you organize quality financial records and ease a future transaction.

Audited financial statements

Many family-owned businesses do their financial reporting informally in order to file their tax returns. While foregoing an audit of your financial statements may seem like a smart cost savings, it could negatively affect the price a buyer is willing to pay for your company.

Your compiled financial statement is your representation of the company’s financial position. An audit or review opinion on your statements can raise the standard of the financial information.

Cash versus accrual basis

Many closely held businesses maintain their accounting records using the cash basis, whereby revenue is recognized when payments are received and expenses are recorded when paid. Most buyers will expect to see financial statements presented using the accrual basis, which essentially reports revenue when earned and expenses when obligations are incurred. If you are thinking of selling your business, consider switching to a more standard, accrual-basis, month-end close.

Get organized

The depth and breadth of financial due diligence is often surprising to business owners. A buyer’s due diligence representative and your investment banker will generally request three to four years of records organized on a monthly basis. Reports that are typically requested include:

  • Trial balances
  • Customer sales registers
  • Account details
  • Payroll records

Having these items in an easy to navigate repository now will help you provide the buyer with information necessary to establish a historical context for your business.

Reverse due diligence

Reverse due diligence, or sell-side due diligence, is when the seller hires professional help to organize and present the information buyers will be most interested in. Reverse due diligence can be particularly helpful when:

  • You are converting from a cash to accrual basis.
  • You have not had an audit, but would like to provide organized financial information to a potential buyer or pool of buyers.
  • You are concerned about your ability to provide timely and accurate information during the due diligence process.
  • You don’t feel that your financial statements tell the whole story of your current finances.

Although the buyer will most likely still perform their own buy-side due diligence, the use of a sell-side firm will allow you to proactively arrange your financial information.

While some might equate selling your business with selling a car or a house, you will find that the transaction is more like an artist selling a painting: you are monetizing a piece of your life’s work translated onto the canvas by financial reporting. Presenting your business in the best possible light by making sure your books are accurate, well organized, and easy to understand can aid you in securing a fair price for this masterpiece.