No one wants to buy a house that’s in disarray. The same is true of businesses. Cleaning up your balance sheet before you put your business up for sale will save you time, money, and heartache down the line.
At O’Keeffe & O’Malley, we’ve found that many business owners think their financial house is in good order – but they’re actually opening themselves up to unnecessary giveaways. People often focus on the income statement and the earnings, which drive up the value of the business. But if you aren’t smart with your balance sheet, you may give away some assets.
Fine-tuning your balance sheet and getting some items off your books will benefit you down the line. Here’s somethings to look for.
- This is often a component of working capital – and usually a buyer is purchasing working capital. If you have a lot of cash on your balance sheet, some of it could end up going to the buyer. So, you might be better off minimizing your cash in the bank. Otherwise, you might just hand some of it over to the new owner.
- Accounts receivable. Older receivables can create some issues when you go to sell. Try to get these accounts current below 60 days before you go to market. You’re better off staying on top of them and keeping them collected. Otherwise, you may end up reimbursing the buyer for uncollectible receivables or reducing the agreed to purchase price.
- Buyers usually only buy current and saleable inventory which was from the last 12 months. Stale and obsolete inventory can harm you. If you’ve got older inventory, dispose of it now. Sell it or write it off, but get it off the books.
- Owner’s vehicles and artifacts. These don’t add value to your sales price as they are non-operating assets. But, if they’re on your books, they could end up going with the business when you sell. If you have a company car, eliminate it from your balance sheet. The same goes for personal items like art or keepsakes. Remove these from your balance sheet and physically remove them from the facility. That way, there’s no question whether or not they’re part of the sale.
- Life insurance. A buyer doesn’t need to assume or buy your life insurance, but they may take it if you leave it on the books. Eliminate items like this that don’t add value to the sales transaction, or at the very least clarify early on it’s not part of the transaction.
- Employee vacation that has been earned but not used isn’t always recorded on the balance sheet – but it should be. If it’s not on the balance sheet, you may have to pay the employees the amount owned at closing. If it is on the balance sheet, it may be assumed by the buyer as part of working capital.
- Whether it’s a computer or a bulldozer, don’t let equipment and other fixed assets that’s no longer in use remain on your balance sheet. Eliminate them from your assets on the balance sheet and all equipment lists and depreciation schedules.
- Clear cut-offs. When it comes to accounts payable and other accrued expenses, make sure your month-end reports are clean with accruals of invoices not received properly recorded.
Your balance sheet is just one of the many important details that can impact a sale and the proceeds to you. If you have questions or know it’s time for professional guidance, O’Keeffe & O’Malley can help. Give us a call at 913-648-1085 for a confidential meeting about selling your business.