Are you considering selling your business? If so, it's crucial to understand how your financials play a pivotal role in determining the value of your business. While reducing tax liabilities might be a common practice, it can inadvertently impact your business's perceived profitability. In this article, we'll explore the concept of normalizing your financials and why it's a smart move when preparing to sell your business.
Setting the Stage: Presenting True Profitability
When it comes to selling your business, potential buyers are interested in the numbers – specifically, your business's profitability. However, many business owners strategically manage their finances to reduce their tax obligations. While this may be an effective way to save money in the short term, it can have unintended consequences when it's time to sell.
Buyers, as well as the financial institutions that support them, will be scrutinizing your financial records to assess the true health of your business. This is where the concept of normalizing your financials comes into play.
What Is Normalizing Your Financials?
Normalizing your financials involves adjusting your reported profits to account for expenses that may not accurately reflect the ongoing operational costs of the business. These adjustments are known as "add backs," and they essentially increase the reported profit on paper. This, in turn, increases the perceived value of your business.
The Role of a Business Broker or M&A Advisor
Navigating the intricacies of financial normalization can be complex, especially if you're not well-versed in financial analysis. This is where the expertise of a business broker or mergers and acquisitions (M&A) advisor becomes invaluable.
These professionals have the experience and knowledge to meticulously review your profit and loss statements (P&Ls) and tax returns. They will identify line items that might have been classified as business expenses for tax purposes but are not truly reflective of the ongoing operational costs of the business.
Benefits of Normalizing Your Financials
Normalizing your financials offers several benefits:
1. Accurate Valuation: By adding back nonrecurring and personal expenses, your business's true profitability is reflected. This, in turn, enhances the value of your business in the eyes of potential buyers.
2. Transparent Representation: Accurate financials provide transparency to buyers during the due diligence process, fostering trust and confidence.
3. Streamlined Negotiations: Clear and accurate financials can streamline negotiations, as both parties have a more precise understanding of the business's financial health.
Documentation: The Key to Success
It's important to note that the add backs you make during the financial normalization process must be well-documented and substantiated. Buyers will conduct thorough due diligence, and having solid documentation ensures that your adjustments hold up to scrutiny.
When it's time to sell your business, maximizing its value is a top priority. By normalizing your financials through the expertise of a business broker or M&A advisor, you present a clearer picture of your business's true profitability. This not only enhances the perceived value of your business but also sets the stage for a smoother sales process.
Remember, each business is unique, and the normalization process will vary based on your specific circumstances. If you're considering selling your business, it's advisable to consult with professionals who understand the intricacies of financial normalization. With their guidance, you can confidently navigate this crucial aspect of selling your business and secure the best possible outcome. Feel free to reach out to Jason Sousa and the team at the Great Lakes Business Alliance for assistance and expert advice. Your journey to a successful business sale begins with accurate financials and strategic guidance.