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How to Bulletproof Your Earnings

In my last post, I talked about how many entrepreneurs manage their business to minimize taxes.  I pointed out how this strategy can create financial statements that distort the value of a business.  Over and over again I have seen cases where a

 seller has given the company’s financial statements to a prospective buyer – only to receive a “low ball” offer for the business.  My response is always: What do you expect?  You gave them a financial statement showing that the company earns very little.  They came to the only reasonable conclusion, based upon the information you gave them.

So, the question I get from these business owners is, “What do I do?”

My first suggestion is this: If you are thinking of selling your business in the near future, you should consider cleaning up your financials three or four years before you begin the sales process.  You need start managing your business to maximize profits – similar to how public companies are managed – rather than the opposite.   If your financial statements clearly show the true earnings capability of your company, then there is a good chance that a willing buyer will offer you a better price for your business. 

What if you cannot take the time to clean up your business financial statements before putting your company on the market?

In my practice, we almost never use your existing financial statements when representing you in the sale of your business.  Unless they are squeaky clean, we typically create a complete new set of financials.  In doing so, we put back into the financials all discretionary or “above market” expenses, in order to show the true earnings capacity of the business to prospective buyers. 

You may be asking, “Why don’t I just reconstruct my financials, rather than actually cleaning them up?”

The answer is quite simple.  Most buyers will accept a certain amount of reconstruction of the financials; however,  if there is a significant amount of recasting, buyers start to doubt the validity of your statements.   When this happens, many buyers will just shy away from the sale.  If they don’t, you can bet that the buyer’s offer will be on the low end of the valuation spectrum.

Most buyers are willing to pay a premium for bulletproof earnings.  By cleaning up your financials and showing the true earnings capability of the company, you will be adding value to your business