The importance of financial information at the sale of a business

Business owners do not always analyze the financial performance of their business every week or every month. This can often be attributed to lack of time. However, good financial information allows one to get a clearer picture of a company. In order to sell a business, the production of good financial statements is very important. It also attests to the owner’s sense of organization and control of business performance. This can allow the potential buyer to gain trust and confidence. The following content is a concise explanation of the importance of financial information for a company to maximize operating results, but also when the owner intends to sell.

What is the purpose of financial information for a business?

The financial information (balance sheet, income statement, etc.) allows the owner to track operating results. It thus enables him/her to make adjustments when necessary and to ensure the sustainability and growth of the business.

Nobody would buy a house without performing an inspection first or ask the opinion of a trusted person. Once the detailed report is received, the buyer can negotiate the price of the house. It’s the same thing for decisions to be made within the company. The owner should take the time to analyze the financial statements and determine where the business makes and loses money. In a way, the decisions for the future of his business depend on it. If the owner does not take the time to analyze the performance of his/her business, it will be more difficult to make informed decisions to improve the business.

From a selling perspective, what is the purpose of financial information?

The availability of good financial information allows prospective buyers to assess three things:

• Current level of profitability;
• Where the purchaser could improve performance;
• Risk level

With access to financial statements, the potential buyer can assess the current level of profitability and determine how he could improve performance. Thus, he can prepare an adequate growth strategy for the company. He will also be able to more easily quantify the benefits of buying the business in question.
As for the level of risk, having a good accounting system is very important. Regularly produced financial statements requiring little or no year-end adjustments by the external accountant are synonymous with efficient internal organization. It also demonstrates good monitoring of the company’s financial performance. In addition to these facts, a potential buyer can assess the risks associated with the enterprise’s administration. Financial information therefore helps to determine where to put the effort required to improve profitability.

From a sale’s context, does the financial information help increase the value of the company?

Having good financial information and being able to use it allows the business owner to understand the enterprise’s profitability. Along with knowledge of the real company profits and a business valuation prepared by a Chartered Business Valuator, financial statements will complete the picture. Therefore, the owner will have one more tool to determine the strengths and weaknesses of the business. He will then establish a strategy in order to increase performance and his company’s profits to be able to sell for a better price in the future.

Let’s assume you have the choice to acquire one of two companies. The first company presents only annual financial statements. The monthly financial information is not produced regularly and thus is not available. The second provides good financial statements, produced monthly. In addition, the owner of the second company has a good understanding of the performance of the business and is able to clearly answer all your questions about its financial performance. Other than these elements, the two companies are identical. Which one will you choose?
The second company, with monthly financial statements that enables you to understand the current level of profitability? Me too.

The importance of financial information …

Ultimately, financial information allows the owner to get to know his/her business. It reassures the potential buyer and increases confidence in having information that allows him/her to build a potential business strategy. The financial statements also serve to more easily quantify the benefits of acquiring a company rather than another.

If the owner plans to sell his business, good financial information may help to maximize the value of his business.