By the time a buyer asks to see your financials, there is much less room to fix inconsistencies without slowing the deal or raising questions.
Businesses with clear, consistent and well-supported financial records are generally easier for buyers to assess and easier to take through due diligence.
That preparation should start before the business goes to market, not once a buyer is already asking for documents.
Thinking about selling in the next one to two years? The earlier you prepare the financial side of the business, the more options you have.
Book a Free Client Assessment →Why the Numbers Matter Before a Buyer Arrives
A buyer is usually interested in what the business can sustainably earn in the future, not simply what it made last month.
For many established businesses, maintainable earnings are an important part of the valuation. However, the appropriate valuation method depends on the business, the industry and the assets involved.
Whatever method is used, the financial history needs to support the story being presented.
Inconsistent bookkeeping, unexplained transactions or private expenses mixed through the business accounts can make it harder for a buyer to understand the true performance of the business.
Clear, consistent financial information can give a buyer greater confidence in the valuation and reduce unnecessary questions during due diligence.
Get the Financial Records Into Order
Before approaching buyers, have the recent financial history organised and ready.
That will commonly include two to three years of financial statements and tax returns, together with current management accounts. Depending on the business, a buyer may ask for a longer period.
The financial records should also reconcile properly with the underlying source documents.
In practice, that means separating personal and business expenses, reconciling the accounting records to bank statements and tax returns, and making sure the current financial year is up to date.
Unusual items should also be explained clearly.
A one-off expense, major bad debt, unusual contract, customer loss or exceptional revenue item may not be a problem if it is properly documented. Unexplained movements are harder for a buyer to assess.
Know Which Add-Backs Will Stand Up to Scrutiny
When valuing a business, owners often adjust reported profit to show what they consider to be the normal or maintainable earnings of the business.
These adjustments, commonly called add-backs, might include genuinely one-off expenses, private expenses paid through the business or owner remuneration above a reasonable market level.
The important question is whether the adjustment is properly supported and whether the expense is genuinely unlikely to continue under new ownership.
Aggressive or poorly documented add-backs can reduce a buyer's confidence in the broader financial information.
Preparing the add-back schedule with your accountant before the business goes to market gives you time to support each adjustment and explain any unusual items clearly.
Do Not Focus Only on Profit
Profit is important, but it is not the only number a buyer will look at.
A buyer may also review:
- debtors
- creditors
- stock and inventory
- employee entitlements
- tax liabilities
- loans and finance arrangements
- working capital requirements
- capital expenditure.
A business can report healthy earnings but still require significant cash to operate.
For example, a business with slow-paying customers or high stock requirements may need more working capital than the profit figure alone suggests.
Understanding these numbers before a sale helps avoid surprises during negotiations.
Review the Sale Structure Before You Go to Market
How the business is currently owned will affect how a sale can be structured.
Depending on the circumstances, the transaction may involve a sale of business assets, shares in a company, units in a unit trust or another ownership interest.
The legal and tax consequences can differ significantly between those options.
If the existing structure was set up years ago for reasons that no longer apply, it is worth reviewing the position before a buyer is at the table.
However, restructuring immediately before a sale can itself create tax, duty and commercial issues. Changes should not be made simply because another structure appears more convenient for the transaction.
The tax and legal position should be reviewed before any restructure is implemented.
Your business structure also decides what can actually be sold, and what tax applies when it is. We cover that in the companion piece on the tax side of a sale.
Tax on the Sale of a Business →Build the Data Room Early
Once discussions become serious, a buyer will usually ask for documents covering the financial, legal and operational position of the business.
Depending on the transaction, that may include:
- financial statements and tax returns
- current management accounts
- the add-back schedule
- leases
- major customer and supplier contracts
- employment records
- licences and permits
- insurance information
- details of material disputes
- finance and security arrangements.
Preparing these materials before they are requested can keep due diligence moving and gives you time to identify missing documents or inconsistencies before the buyer does.
If employees may transfer with the business, employment records also need to be handled carefully and in accordance with applicable workplace laws.
Check the Business Can Operate Without You
A buyer is not only buying historical earnings. They are also assessing how dependent the business is on the current owner.
If key customer relationships, supplier arrangements, approvals or operational knowledge exist only in the owner's head, that can affect value.
Where possible, document key processes, make sure customer and supplier arrangements are properly recorded, and reduce unnecessary dependence on one person.
A business that can operate smoothly without the outgoing owner is generally easier for a buyer to understand and transition.
Make Sure the Legal and Financial Story Match
The financial information and the legal documents should tell the same story.
If the accounts show revenue from a major customer, check that the contract actually exists and can continue after the sale.
If the business depends on leased premises, make sure the lease is current and transferable.
If particular equipment appears as a business asset, confirm that it is actually owned by the business and is not subject to finance or another security interest.
These issues are easier to deal with before a buyer raises them.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, our accountants and lawyers can work together to prepare a business for sale.
Our accounting team can help organise and test the financial information a buyer is likely to review, including management accounts, add-backs, working capital and other key financial issues.
Our lawyers can advise on the sale structure, contracts, due diligence, leases and other legal risks affecting the transaction.
By preparing the financial and legal sides together, the information presented to a buyer can be more consistent from the outset.
If a sale is somewhere in your next one to two years, the best time to start preparing is before a buyer is already at the table.
Book a Free Client Assessment →
Frequently Asked Questions
1. How far ahead of a sale should I get my numbers ready?
Ideally, well before the business is marketed. For many businesses, that means having at least two to three years of clean financial history available, together with current management accounts. If the records are inconsistent or personal and business expenses have been mixed, earlier preparation gives you more time to correct and explain the position properly.
2. What is an add-back?
An add-back is an adjustment used when assessing maintainable earnings. It may relate to a genuinely one-off expense, a private cost paid through the business or another expense that is unlikely to continue under new ownership. Whether a buyer accepts the adjustment will depend on the evidence and the circumstances.
3. Does my business structure affect how I can sell?
Yes. Depending on the structure, the sale may involve business assets, company shares, units in a unit trust or another ownership interest. Each option can have different legal and tax consequences, so the structure should be reviewed before the business goes to market.
4. What should I have ready before approaching a buyer?
At a minimum, have the recent financial records organised, current management accounts available, a clear add-back schedule and the key legal and operational documents in order. That may include leases, major contracts, employment records, licences, insurance information and details of any material disputes or liabilities.
This article contains general information only and does not constitute legal, accounting, tax or valuation advice. The preparation required for a business sale depends on the structure, industry, financial position and proposed transaction. Professional advice should be obtained before marketing or restructuring a business for sale.