We get it. You are a friendly, trusting person. You hear from another friendly person that they are interested in buying your business. After you’ve had an initial conversation with a potential buyer (and maybe you have them sign a confidentiality agreement), you send them your financial statements. These, together with your website and conversations with you, should give the potential buyer a good start in presenting you with an offer for your business. This all seems logical.
Don’t do it.
In almost all cases, buyers are better at buying than you are at selling. When you give them your financials, you are giving them the opportunity to craft their own story about your business and it’s unlikely to be 100% accurate.
- Had a down year because a supplier went out of business? That’s not going to show up in your financials.
- Did you have a very expensive, once in a lifetime, lawsuit you were involved in? That’s going to show up in your expenses and the casual observer won’t know to remove it.
- Have your nephew on the payroll as a favor to your sister? This will be included in the “payroll expenses” line and no one will know at first glance that his expense can be removed.
Audited, reviewed, compiled, Quickbooks™ or SAP™, it doesn’t matter. If you are going to engage in a discussion with someone about buying your business, take the time to talk with an M&A advisor. That advisor will assist you in putting together a comprehensive story about your company’s past performance and future possibilities. Most importantly, they can present your financials in a way that tells the right story. For example, we have had clients that have put in place amazing productivity programs that immediately show profitability improvement. For a buyer to properly evaluate those businesses, they are going to need to be shown how those improvements will impact future performance – and then – they will need to pay for that improved performance.
Buyers will not point these areas out to you or offer to pay you more if they spot one-time expenses in your financials. Chances are, they will try to keep that upside for themselves. When buyers have a seller alone, they can use your own financial statements to keep prices low. Furthermore, even if the one-time expenses in your financial statements are small, when you are being paid as a multiple of earnings, they can have a huge impact on the value you receive.
I know it seems simple. I know it seems harmless. Don’t do it. Call an investment banker. At TKO Miller, we offer free valuations for companies that have been contacted by a potential buyer. Those valuations include a conversation with the owner to make sure that the valuation captures any one-time events or business-specific nuances that might be involved. Go into the conversation fully prepared and use this service.