My Florida Business Broker

Creative Accounting Will Hurt Your Company’s Sale

Every business owner has a system for keeping the books, which may reflect their personality or stem from how they learned to do it (or not do it) from others. You can tell a lot about a business from how frequently recorded, how well organized, and how detailed the records are.

That’s why an experienced broker strongly encourages you to clean up your books before selling your company. The due diligence period is an essential part of deciding to buy a company, and buyers need to have confidence that the information they’re using to make a decision is accurate and up to date.

Books that don’t match tax filings are a red flag for any investor and lender, so reconciling your Profit and Loss Statements and Balance Sheets with the tax records is a good place to start. If you and your accountant have not been able to do this, it’s worth it to hire someone from outside to get it done. Some consultants work strictly on helping business owners improve their systems and recordkeeping that won’t replace your current CPA. 

Accounting records that aren’t organized and easy to understand frustrate buyers. If you have too many expenses labeled “miscellaneous” or “uncategorized,” get them cleaned before showing them to a potential buyer. The diligence period is also a time for building trust, which is essential to getting any deal done. If a buyer feels he can’t trust your accounting, he may wonder whether he can trust you.

And let’s address the issue of add-backs – something we see in almost every business. If you’re unfamiliar with the term, add-backs are expenses the current owner pays but will no longer exist under new ownership. They are considered unusual, non-recurring, or discretionary expenses, so they’re added back into SDE (Seller’s Discretionary Earnings.) Seller Discretionary Earnings = EBITDA (Earnings Before Interest, Tax, and Depreciation) plus owner salary, perks, and any one-time, non-recurring expenses) 

It’s not unusual for an owner to charge their personal auto expenses and perhaps some other family members’ auto expenses to the company. Vehicles, meals, and other outlays are often listed as company expenses, even if they benefit the owner in their personal lives as well. But if you have too many non-typical add-backs and/or something extraordinary on your books (I’ve seen boats and luxury vacations), it becomes more difficult to use these as add-backs; lenders will not accept them, and it will make it difficult for the buyer to obtain bank financing. 

Most owners practice an (understandable) tax minimization strategy in their company, trying to avoid paying more tax than the bare minimum. But if you’re selling your company, you may want to be more conservative on that approach. Every dollar that goes back into SDE adds to your company’s value. Most companies are sold for a multiple of their SDE, meaning that’s where the value is.

Do the math: you pay tax on a fraction of the profit of the business. When you sell your company, you get a multiple (often 2x-3x or more) of the SDE.

Let’s just call it housekeeping; you’d certainly ensure your home was at its best before you put it on the market, and your company should be in great shape too. Lenders hate add-backs, and messy books drive good buyers off. Every expense you have should be provable and be categorized correctly. 

I once put a company up for sale whose books were, let’s just say, not immaculate. We could not find a buyer for it. So, after several months, we pulled it off the market and the seller hired a consultant to come in and clean things up. After a few hours of consulting time, they now had a company that attracted several buyers when we went back to market and sold a short time later.

It’s worth every minute of work to clean up your profit and loss statements and balance sheets  before you list your company for sale. The time you spend preparing your financials will be returned to you in terms of the value and ease of sale of your company. 

If you’re exploring the options to sell your company, the first step is to ask us for a complimentary opinion of value. 

Bianca Evans

Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field and has completed over 200 transactions since 2006. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.

In her 17 years of experience, she has sold businesses in manufacturing, wholesale/distribution, service, retail, restaurants, professional offices, and more.