As a business owner, embarking on a business sale journey is a monumental decision that requires thoughtful consideration, planning and preparation. Before you begin the business sale process, one critical area to assess within your business is the state of your financial records. With good clean financials in place, sellers are favorably positioned to maximize their return, plus it will help ensure a smooth financial due diligence process during the transaction.  

If a potential business sale is part of your future exit or growth plans, consider these key steps to help clean up your financials:  

Ensure compliance with generally accepted accounting principles (GAAP). It’s important to either familiarize yourself with GAAP standards relevant to your industry or employ a reliable accounting/finance team with a strong financial background to help you maintain compliance. Deals can get derailed if a seller’s books are not in order. It can also motivate a buyer to discount the purchase price if financials are not in compliance with GAAP and/or on an accrual basis.  

Use a reliable reporting tool/financial system: If your books are not maintained in a dependable accounting system (i.e., QuickBooks, Sage Intacct, etc.), take the time to get a system integrated that will help you produce polished financial statements. A strong accounting and financial system can also be a useful tool to help you better manage your business and make informed decisions to keep operations running smoothly.  

Integrate back-end systems into your financial system: At a minimum, your enterprise resource planning (ERP) system should speak to your financial system as often as the ERP system has the data needed to integrate and produce accurate financials. Several companies will use the data in the ERP system to book manual journal entries into the financial system or book of records, which can be extremely time consuming and subject to human error. If the integration cost is not too expensive, and there is time to do it, ensuring your ERP system feeds real-time data directly into your financial system at least daily, or if possible, multiple times a day, can improve efficiency as well as the accuracy of information. 

Evaluate your team and get proper resources: Do you have the proper team and resources to get you to a month-end close with clean financials? In some cases, small businesses will typically have a bookkeeper or third-party accountant close their books annually, and therefore, do not have good current or historical records to even be able to sell. To better position your financials prior to a sale, consider hiring an interim CFO or controller with prior deal experience. A company with a strong accounting/financial team will have the following in place: 

• Proper controls, processes and procedures. 
• Clear roles and responsibilities are defined within the group. Your accounting/finance team should also be cross-trained on roles and responsibilities. 
• Timely month-end closes. Books should be closed within five to 10 days after month-end. 
• Reconciliations for all balance sheet accounts, at a minimum. 
• Annual budgets at the departmental level with monthly reviews, ideally with department heads, on an actual versus budget basis. 
• A proper chart of accounts allows a reader of the financial statements to quickly understand the key products, departments, divisions and key metrics of the company. 
• Financials in compliance with GAAP and on an accrual basis. 
• Proper treasury management, including cash-flow management and financing arrangements with banks. 

A strong accounting/finance leader can help you lead the company through the financial due diligence and negotiation process seamlessly, which is key during a potential sale.

Conduct a financial statement review or audit: If you are considering a sale or seeking financing from a lender, have a financial statement review or audit completed. A review or audit can help you better understand your bottom line, make more informed business decisions and enhance your credibility as a well-managed business. Due to higher interest rates over the past few years, banks have tightened their lending practices, requiring businesses seeking financing to conduct an annual review or audit for consideration. Many potential buyers also require this as they evaluate potential sellers. An annual audit or review, will not only help with financing and getting to a sale, but it will also help you evaluate and ensure your books are clean and in compliance with GAAP. 

Consider a seller's Quality of Earnings (QoE) as part of diligence: Even if an annual review or audit is being completed, a QoE will help you not only understand the integrity of your own books and whether they will pass a buyer’s QoE, but it will also help you understand key customers, concentrations, financial ratios, working capital metrics and more. This information may help you fix or prioritize other items within your business to build value before going to market. 

Whether or not a business sale is part of your strategic objectives, maintaining clean financial records should always be prioritized to ensure your business is running efficiently. Doeren Mayhew's business advisors can help you assess your current financial processes, as well as offer recommendations and help implement best practices based on your industry and business situation.