The first article in this series on selling a business during the pandemic reported that sales of small businesses are up again after a significant drop in the spring and discussed the importance of establishing a value for a company to be sold.
This story will review financial information sellers should compile for potential buyers or their lenders to convey their firm’s financial condition. Space does not allow for detailed discussion of these documents so sellers might wish to consult with their CPAs to refine the process.
A potential buyer will want to review a seller’s profit and loss statements for the past few years, which will show sales revenue as well as other income from rentals, interest paid by financial institutions or the sale of property, equipment or assets.
It will also show production, and other operating costs. The first category includes raw materials, equipment purchases, leases or repairs, advertising, marketing, travel and entertainment expenses. The operating cost portion includes salaries, employee benefits, insurance premiums, rent or mortgage payments, utilities, office-related expenses, depreciation of equipment, taxes, professional fees and loan repayments.
“Of particular interest to a buyer will be the net income component of the profit and loss statement,” said Mark Dunsmoor, senior vice president of Legacy Bank. “This is calculated by subtracting a firm’s expenses from its total revenue. If expenses are less than revenues, owners have generated a profit. If not, the statement reflects a loss.”
A potential buyer will also want to see a current balance sheet covering the seller’s assets and liabilities. Assets may vary depending on the business but should include cash-on-hand and assets that can be converted into cash within a year, rent or insurance premiums paid in advance and funds owed the company according to Dunsmoor.
Other assets would include an inventory of completed products, plus raw materials or parts to produce more items. Fixed assets such as land, buildings, machinery, office and technology equipment and other durable items will be documented, as well as, the value for intangible assets such as a company’s good reputation, its solid customer base, perhaps a highly recognized brand, proprietary technology, trademarks and patents or a specialized workforce.
The liabilities section of the balance sheet should include current liabilities that need to be paid within the next 12 months such as accounts payable, short-term loans, payroll, taxes, credit card bills, interest on debt, said Dunsmoor. Long-term liabilities include costs that do not have to be fully paid within the next year such as mortgages or the total balance on loans the company may have.
A third element of the balance sheet reflects owners' equity which represents the owner's or stockholders’ investment in the business. This figure is calculated by subtracting the company’s liabilities from its assets.
A buyer will also want to review the seller’s cash flow statement which reflects a company's short-term earning potential, showing anticipated revenue as well as expected expenses.
Finally, sellers should be able to provide both personal and company tax records from the past few years, which can be used to collaborate data presented in the financial statements.
Mark Dunsmoor is a senior vice president of Legacy Bank with 40 years of banking expertise. Dunsmoor has been recognized as the Greater Pueblo Chamber of Commerce Charles W. Crews Business Leader of the Year and volunteers in many capacities including on the local hospital board.
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