Cash is King: Prepare Your Balance Sheet for a Business Sale

What Can I Do to Make My Balance Sheet More Appealing to Buyers?

You’re a business owner contemplating a sale. Intuitively, you understand that it’s important to make your business look attractive to potential buyers. However, if you haven’t sold a business before, you probably don’t know how to accomplish this.

Why Clean Up Your Balance Sheet?

Generally speaking, you want to look profitable, efficient and upward trending. You want your employees to look productive and your customers to appear loyal. You want the potential buyer to see valuable assets and minimal liabilities in your financial statements.

One of the most important statements that a buyer will evaluate is a balance sheet. A balance sheet tells buyers several data points, from how much cash your business has on hand to how well your business utilizes that cash. Before you sell your business, make sure to minimize your expenses and maximize your presented earnings as you prepare your balance sheet.

3 Tips for Demonstrating Healthy Cash Flow

What really makes a company look attractive? Cash flow. Cash is the most important part of a balance sheet, and an attractive statement will demonstrate healthy earnings and necessary expenses. Below are three tips for making the best impression on a buyer and demonstrating healthy cash flow.

1. Buyers Care About the Balance Sheet

You need a strategic plan to make your business look as appealing as possible so you can find the right buyer. I’m not recommending doing anything underhanded; rather, I’m talking about taking some extra care and putting your best foot forward. 

This process is most effective when started at least one or two years in advance. You may want to sell your business much more quickly, but you still want to start this process as early as possible.

2. Clean Up Your Expenses

When I was a financial adviser, I’d ask to see an itemized list of all of my client’s monthly expenses. The point was to find potential places to save money, which I called “trimming fat.” 

No matter how frugal or disciplined the client was, we always identified unnecessary expenses: magazines they did not read, too-pricey grocery stores, mutual funds with unnecessarily high expense ratios, and so on. Business owners experience similar expenses, such as:

• Unused fraternal memberships
• Outdated advertising expenses
• Unread periodicals
• Company vehicles that are used for personal functions. 
• Excess meals or vacations on the company credit card.
• Someone on payroll whose performance doesn’t justify their salary

Many buyers or their advisers are sophisticated enough to see such expenses and account for them when evaluating the business. When this happens, transaction advisers often refer to such expenses as “add-backs.” This is because the money spent on expenses a buyer thinks are unnecessary will be added back to EBITDA (earnings before interest, taxes, depreciation, and amortization). When a buyer does this, it is sometimes known as “normalizing” earnings.

Also, check with your accountant about other expenses, such as:

• Excess depreciation above replacement cost of capital equipment
• Excess amortization over the value of intangible assets
• Non-recurring expenses unrelated to business operations that should not detract from the company’s discounted future cash flow
• Insurance expenses on assets or key personnel (including yourself) that will not be transferred to the buyer

3. Clean Up Your Earnings

When you decide to sell your company, the incentives for reporting earnings tend to reverse. Think about it this way: if you’re going to own the business next year or three years from now, you want to underreport your current earnings and reduce current tax liabilities. When you think you might sell the business next year or three years from now, you want to report as much income as possible to increase your valuation.

Consider an aggressive sales campaign in the 12 to 24 months before putting your business on the market. The key is to do this without incurring a lot of new costs. On the other hand, however, a buyer who conducts due diligence may notice such sales and interpret them as tactics designed to make the business look better. Maybe your accounts receivable are a little older and, with a little focus, can be brought current.

Another good rule of thumb is that not all kinds of earnings are created equal. Earnings from high-margin products or services are more desirable than earnings from low-margin products or services. Repeatable and dependable earnings are much stronger than inconsistent ones. Consider shifting your operational focus to emphasize healthier revenue streams.

Preparing Your Balance Sheet Can Boost Your Business Sale

Identifying these areas of improvement and successfully cleaning up your earnings and expenses requires that you prepare your balance sheet early and communicate with your accountant about what a buyer may notice that you may not.

We think you’ll also like:

1.   Seller Financing When Selling A Business
2.   5 Management Responsibilities that Aid the Sales Process
3.   Purchase Agreement Essentials: Boilerplate Provisions Terminology

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1.   EBITDA and Other Scary Words
2.   Valuation / What’s it Worth? Valuing a Business for Sale
3.   Selling a Business-101

This is an updated version of an article originally published on July 13, 2016, and recently republished on October 20, 2020.]

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