Before buying your business, a potential suitor will want to evaluate your company’s financial health. Profit and loss statements, cash flow statements, tax returns, and a current balance sheet will be requested of you.
Only regulated and publicly traded businesses must adhere to Generally Accepted Accounting Principles (GAAP), and many private companies choose to apply other accounting methods. Their statements are typically oriented to effective management, as opposed to satisfying investors or buyers. GAAP ensures that a company’s financial records are clear and comparable to those of other businesses.
Your financial records will be used to calculate the business’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), the most relevant figures a buyer will use to determine what to offer for your business.
So, why is it crucial to call your accountant before sharing your financial statements?
Because you do not want surprises, and neither does the buyer! Closely held companies often depress EBITDA, in the course of minimizing income taxes, thereby compromising the business’ value at the time of sale. Your accountant may wish to revise your financial statements to depict EBITDA more accurately. And, ensuring that your accountant prepares statements that conform to GAAP or another consistently applied accounting method allows for the comparison of “apples to apples,” which is in everyone’s best interest.
So, call your accountant first! And then call us. At Chipman Mazzucco Emerson LLC, we have years of experience assisting clients in the purchase and sale of businesses.
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