Having the Right Documents Leads to A Higher Purchase Price
In the initial business evaluation between the seller and the business broker, the seller should provide certain documents that enables the business broker to price and list the business properly. A well prepared seller with the right documents generally leads to a higher purchase price. This is because buyers trust the represented cash flow and positive merits of a businesses that is backed up with clear and transparent documentation. Moreover, having the right documents will make it far easier for a buyer to obtain SBA financing on the business purchase. The documents differ in importance depending on industry, but sellers should generally have their financials, lease, equipment list, and an itemized list of personal ‘add-backs’ available for review.
Financials of Business Most Important When Selling Business
The financials of a business are generally the historical tax returns or profit and loss statements. It is best to have the three most recent years available (preferably in PDF format for tax returns which is easier to view and send). The tax returns and profit and loss statements should both tell the same tale as far as the overall sales and overall profits (or ‘adjusted owner benefit‘) of the business, but in differing formats. Often times, sellers have their own Quickbooks-generated profit and loss reports, which are fine to use so long as they are accurate and generally match the provided tax returns.
Include Most Recent Financials
- The intelligent buyer knows that the most important attribute when buying a business is the future cash flow of the business.
- While historical financials are very important (especially when needing outside bank financing), the current performance and future trajectory of the business is even more important.
- If the selling process takes place mid-year or later, sellers should thus have an interim profit and loss report for that same year (obviously the tax return for that year will not be available since the year will not have been completed yet).
- Moreover, if obtaining historical financials is problematic, then the seller should do everything possible to still compile or obtain a set of financials for the most recent 12 month time period.
Some Business Sellers May Not Have Typical Financials
In some industries, it is generally accepted that tax returns or even profit and loss statements do not describe the true nature of the business’s sales or profits. When selling laundromats for example, buyers often rely on utility bills to gauge the sales levels. This is simply because of the cash nature of laundromats. As long as the buyer understands what is available and otherwise receives sufficient information to make a well informed offer, then a successful sale may still take place. Likewise, when selling restaurants, some buyers may be comfortable proceeding with the purchase without typical financials. Such buyers are comfortable with viewing the foot traffic and sales activity of the restaurant without needing to look at the tax returns or profit and loss statements.
Itemized List of Personal Add-Backs Help Sellers Increase their Valuation
- It is quite common for many owners of businesses to expense their personal or family bills (such as auto, healthcare, or cell phone costs) through the business.
- This means that the tax return or profit and loss statement contain these personal costs and expense them as business expenses.
- In reality, such costs are considered ‘add-backs’ to the adjusted owner benefit because the costs would not be borne by the buyer and are not legitimate business expenses.
- The seller should identify the expense category within the tax return or profit and loss statement and the general amount of the add-back.
- The seller’s salary (or spouse’s salary) should also be identified and generally counted as an add-back.
- These and other hidden assets of a business – if known and properly disclosed – will increase the advertised profits of the business and hence the purchase price of the business.
Lease Important Document
Assuming the business owner is renting their premises, the seller should make their lease available for review in order for a business broker to properly evaluate their business. With retail business in particular the lease is of paramount importance and should be analyzed to determine the length of the lease, any personal or corporate guarantees, the annual rental increases, and any other significant terms or provisions. While it is not typical to give the lease to buyers until the formal due diligence phase begins, the major terms of the lease must be known and disclosed in the initial stages of the selling process.
Equipment List A Necessary Document Needed to Sell Business
- An equipment list refers to any movable items that are owned by the company.
- It does not include inventory which are items of resale value and does not include leasehold improvements which are attached to the property and not movable (these items are still important to a business valuation but they are not considered equipment).
- The equipment list should describe the major items of company owned equipment (industry jargon is fine) along with the year of service and their currently depreciated value.
- Having an equipment list is necessary for any buyer to obtain external financing and informs the buyer of what physical assets are included in the asking price.
Retail Businesses Should Also Have Inventory Report
For retail businesses such as clothing stores, convenience stores, or furniture stores, an inventory report is also a necessary document needed to sell the business. The inventory report will separately list the current inventory in the store ‘at cost’, at retail value, and by age. Inventory can make up a major component of the final purchase price for retail businesses, and thus should be disclosed with as much transparency as possible.
The less surprises and more transparency means a smoother transaction and a satisfied buyer. A business owner with an organized and prepared set of financial and company documents will generally receive a higher purchase price for their business.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.