The First Step in Selling Your Business
While there are many things you can do to enhance the sale of your business, the first step is to take a hard look at your financial statements.
Any interested buyer will want to see your financials before they will make an offer. You need to make sure your profit and loss (income statement) is simple to understand and to clean up your balance sheet.
Here are a few tips on cleaning up your balance sheet
- Unless your company is financially distressed, low cash balances send a signal to a buyer that you are not financially strong. Suggestion is that you should maintain a cash balance of at least one week of sales – two weeks is better.
- Make sure the inventory is correct. Many companies never update the inventory number from year to year or simply adjust based on sales. Inventory should be done at least once a year. Best time is at your fiscal year end. Include work in process that is completed but not billed.
- Make sure your accounts receivable does not include any amounts that are over 90 days. Write off old receivables even if you are still trying to collect. Record the income later if you are lucky enough to collect.
- Make sure any employee or owner loans receivable get paid or are put on a schedule to get paid in a timely manner.
- Capture any prepaid expenses on your balance sheet. These include insurance, maintenance contracts, dues, subscriptions etc. The items should be anything you have already paid that you would expect to be credited for when selling.
- Make sure your all loans are properly categorized properly into short term and long term liabilities. Basically any part of a loan that has to be paid back within 12 months is a short term liability – this includes your credit line.
- Any loans owed to the shareholders should be paid off if at all possible.
- If the balance sheet equity is low or is negative, that is a bad signal to a buyer. Even though, most transactions are simply asset purchases and not stock purchases, low or negative equity signals that the shareholders are taking out all or most of the profits.
I will address how your income statement should look in my next blog.