If you want to sell your business, fix your financials first
If you own a small business and have not filed 2023 taxes yet, STOP and fix your financials first.
Especially if you want to sell in the next 2-5 years
You know what I mean.
Clean out most of those personal expenses from your books, so they match your tax returns and show the TRUE financial picture of your business: i.e. your cashflow.
Your cashflow dictates your worth.
What’s usually ok to keep in there? Your cell phone, life insurance and maybe your car lease. OK, probably a few more.
What is NOT ok? (examples I have seen or heard from my peers in M&A):
– replacement windows on their vacation home
– utilities on their vacation home
– childcare costs (called supplies in the financials)
– summer camp costs (called food and beverage in the financials)
– Amazon purchases (where the business also bought legit supplies)
– cellphones for 11 (eleven!) family members
– gas cards for 3 kids
– “salaries” for kids in college (500 miles from the business)
– invoices from Lowe’s (for a garage added to their house)
– travel and meals for a non-working spouse on a trip to Vegas (where the industry convention was being held)
Yikes!
“Why now”, you ask?
Because buyers like to see 3 years of clean financials, you need to start now in 2023. They actually hate seeing $100k – $500k of “restatements”, that are hard to verify. Banks are not in love with them either.
What are the outcomes if you refuse to make the changes?
Some buyers will walk away as soon as they see a tax return of low or negative income.
Some insist on escrowing 10% or more of the purchase price for 2-3 years – so they can verify the real expenses of the business.
Others insist on 80% seller financing, since no bank will offer a loan. (A Seller can ask for a 3-5 year balloon, so that the buyer can get a regular bank loan using their financials).
Bottom line: there is still no such thing as a free lunch.
Running clean financials now, will pay off at the closing table: The taxes you pay could be worth 5x to 10x at the closing table.