We think the answer in most cases is, no. It’s often like the person who tidies up the house before the maid arrives. Buyers will go through your financials to learn how their own operating style will yield profits using your assets and customer base. They will strip out many of your “below the line” expenses and use what they expect to expend to maintain your operation their way.
Some owners pay consulting fees to transition companies, brokers, or financial professionals to pretty-up the financials in anticipation of putting the company up for sale. This is often money ill spent. There is nothing wrong in running a tight ship for accounting purposes but the exercise is rarely necessary to savvy buyers. Below we list some of the assumptions that business owners might have, along with our reasoning to be less concerned.
Q: If I show higher earnings, I’ll get a better price.
A: Buyers are looking at your sales and the gross margin you earn on goods and services. Running personal use of company cars and business trips to Disney World through the company will be taken into consideration as the Buyer “adjusts” or “normalizes” your earnings.
Q: Improving performance will increase my multiple of earnings
A: Multiples of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) is mainly an external price driver. Industries often have multiples specific to them, these can trend up or down regardless of your performance. A Buyer may look to purchase at a lower multiple expecting his company metrics will improve upon yours. Sometimes, companies that are operationally at maximum efficiency, don’t appeal to certain buyers.
Q: If I don’t pay now to normalize my financials to the industry, I’ll have to pay later when I go through the due diligence period with the Buyer.
A: Advisors who work on a success fee basis generally build this work into their fee structure. A good advisor will work with the Buyer to scrub the financial data according to the Buyer’s particular needs. Business owners often think that their CPA firm has been doing this all along but this is rarely the case. In most cases, CPA firms have spent their energy preparing the company’s tax filings. This is a far different task than preparing your financials to support a sale of the company.