For business owners who are thinking of selling or wanting to find out what their business is worth in today’s market, the first step in the process is sending over financial documents to your business broker, so they can perform the financial recast. In a financial recast, your broker will work with you to “normalize” your expenses, by adding back in non-essential business expenses or non-cash deductibles, to find the true owner benefit that the business provides. That’s the number that matters most to a prospective buyer, and that’s the number that we will use to price the business, based on sold comparables and the industry multiplier.
In order to do all of that work on the recast and pricing, your business broker will need certain financial documents and numbers from you. Here we break down exactly what we need and why:
Last 3 Years of Corporate Tax Returns
To get a good history of financial records, usually we look at the last 3 years of tax returns. Typically, at this first recast and valuation, we use the most recent three years of tax returns; however, buyers commonly ask for the past 5 years of tax returns, so make sure they are ready and available, should a buyer request them during due diligence. Three years of financials gives us a good picture of what’s been happening in the business. We can see if the business has been showing consistent numbers or if it’s been improving year on year or if it’s on the decline. We use tax returns because that is the most official record of financials, one that potential buyers trust the most and would prefer to see over anything else. When you do send over a copy of your tax returns, please make sure it includes ALL of the pages, as we need the first page and then also the expense detail page that is near the end of the return.
Rolling Profit & Loss Statements
Depending on where we are at in the year, we will most likely need a 12-month rolling profit and loss statement. A rolling profit and loss is necessary because we need to know what the business has done in the last 12 months. We want to use a 12-month rolling statement because businesses can be very seasonal, so a partial profit and loss statement, a year-to-date profit and loss, or an annualized profit and loss statement won’t be an accurate full picture of the business’s performance. If you use QuickBooks, a rolling profit and loss is easy to create, you just need to produce a report with custom dates reflecting the most recent complete 12 months. So, for example, if it is June 2022, and your books are current as of May 2022, you would get us a profit and loss statement dated June 1, 2021 to May 31, 2022. That way we have a full 12 months of financial data.
If it’s the beginning of a new year, a full year of profit and loss will be used in place of the tax return that hasn’t been filed yet. So, until you have your tax return completed, we will use the full year profit and loss; however, once your return is filed, we will need a copy of it, so that we can update the numbers to match the tax returns.
Approximate Market Value of Equipment
We need to know what the approximate market value of the tangible assets or equipment that your business owns, which will be included in the purchase price. This amount would be what you could get for the equipment if you sold it on Craigslist, eBay, or at a garage sale. We need this amount because it will be very important for your business broker to determine if your asset value is greater than your business valuation comes out to be, based on your owner benefit. If your asset value is greater than your owner benefit-based valuation, then most likely the best strategy to sell the business would be an asset sale (pricing the business based on the asset value).
Approximate Value of Saleable Inventory
Your business broker will need the approximate value of inventory held for resale. This will be the cost price of the inventory or the current value of the inventory if it is below the cost price (i.e. sale items). It is very important to estimate the value of the inventory that will be present AT CLOSING or at the transfer of ownership, as this is the amount we will include in the purchase price and the amount that will be noted in the sales contract.
Sellers need to make sure that the value of inventory in the sales contract matches up with the inventory count up at closing, so make sure to advise your business broker at the time of signing a purchase contract if you expect your inventory value to be different than the amount you give them at the time of listing your business for sale.
What If I Don’t Want to Send My Documents?
Unfortunately, if you don’t send us the financial documents listed above, it will be impossible for us to give you our opinion of value. A valuation takes hours to perform and we do it for free for any business owner who is considering selling. It is really the first step in the process of selling your business.
So, if you are uncomfortable sending your financial documents to a business broker you don’t know or have never met, make sure to do your due diligence first. Check out their online presence, meet them in person or via zoom, read their customer reviews, ask for references that you can contact, and you can even verify that they are licensed by the state.
If you are concerned about confidentiality, we do have an NDA that we are happy to sign, to promise that we will not share any of your confidential business details until you do end up listing it for sale with us and we are sharing the details to prospective buyers in the normal course of business brokerage.
If you would like to get a valuation of your business or if you have questions about selling your business, please feel free to reach out to us, and we are happy to help.