Strengthen Your Selling Position with a Professional Audit

Selling your business is likely to be the largest and most serious transaction most business owners will ever be involved with. By planning ahead, you can create substantially more wealth when you sell or exit your business.

As you prepare to sell your business, you must first gather documentation. Along with tax returns, audited statements prepared by a highly regarded accountant will help you establish your business credentials. Normally, three years of financial records are adequate to establish the business's direction and profitability. The buyer will carefully inspect your financial statements. Audited figures will strengthen your hand in the negotiations and may enable you to demand better terms. If the negotiating gets tough, the audited numbers will enable you to more easily find another buyer; having more than one party interested in buying your business will be one of your most powerful negotiating tools.

The buyer will want to look into and evaluate your company's past performance and future prospects. It is likely that you will be asked to provide a comprehensive list of company information, such as current, historical, and projected financial statements, including balance sheets, income statements, and statements of cash flow. You may be asked to identify your company's stakeholders, as well as provide the articles of incorporation, bylaws, and relevant business licenses. The buyer is likely to require information about your company's revenue streams, including a list of your customers, dollar amounts, and profitability per customer. You may also be required to provide a detailed sales pipeline and forecast of sales. The potential buyer will likely investigate this information to determine whether it supports the sales numbers in your projected financial statements.

You may also be asked to provide a list of key employees and their professional experiences, and to document employee compensation, including salaries, benefits, bonuses, and stock options. More and more, intellectual property rights are an important asset, especially within the high-tech industry. You may be required to document company patents, trademarks, and copyrights, and to verify that these rights are transferable. You should also provide a list of your business's inventory and tangible assets, such as equipment, buildings, computers, software licenses, and furniture. Explain how these assets are tracked and provide proof that your company has a clear title to all documented assets.

It is possible that a buyer may question the quality of your earnings because your accounting is too aggressive. For example, capitalizing product-development costs can be controversial, as can the presence of onetime gains in operating income. Be prepared to highlight those areas where your accounting is conservative; for instance, where profits have been understated because of accelerated rather than straight-line depreciation, or last-in/first-out inventory valuations.

The cost of an audit is roughly $25,000 for a manufacturing business with sales of $10 million. To avoid this cost some owners have their financial statements reviewed by outside accountants. Although buyers know the difference, at least the review provides a presentation that is professional. If you have inventory and think you might need retroactive audited statements, an essential step is to have outside accountants observe year-end inventory counts for a year or two. This will allow them to express an opinion about the fairness of the statements later on, if necessary.

Many privately held companies are operated to lessen the seller's tax liability. Regrettably, the same operation and accounting methods that minimize tax liability also can minimize business value. This means that there is frequently a conflict between the way an owner wants to run the business and what is required in order to prepare for its sale. For best results, start readying your company for sale three to five years before the actual sale. That way you'll be ready when the time comes.