Preparing for a business sale: Are your accounts in order?
Many people are aware that when they sell their private business, there may be ‘normalisations’ required to the accounts. These normalisations make the accounts more relevant to buyers and investors. For example, these normalisations may remove the effect of private costs, related party transactions, or one-off costs relating to a sale. However, normalisations should be minimised where possible and the accounts should be presented in a clean and transparent manner so as to give a buyer confidence in their accuracy.
The process of accounting due diligence goes much further than basic expense normalisation. Issues uncovered during accounting due diligence can potentially derail a transaction process and often lead to a reduction in the sale price. One of the most important accounting standards relates to revenue recognition. Many SMEs will enact a revenue recognition process which is fine in the early days, but as the business grows the process no longer handles all the sales channels or invoice types.
There are a number of concerning practices that can accumulate within standard procedures. Here are some examples:
- Information from different sales channels may not be transferred to the accounting system within a timely manner
- Changes to invoices may be effected by deleting transactions and creating new ones even after key cut-off dates
- Returns and replacements may simply be taken from inventory without recording any transaction
- Differences between management and tax accounts are not reconciled
The net effect of these practices may not appear material, however to a buyer it is a signal that the system may be prone to errors, and that it is not 100% accurate or trustworthy. As a result, a buyer can lose confidence in the business model or view it as having a higher risk profile. A detailed review may also help you improve the management reporting you receive. Improved management reporting helps answer buyer information requests.
As a result, we recommend talking to your accountant and corporate advisor in the early stages of considering a business sale. Through early consultation and collaboration on a sales process you can maximise value by making the sales process as smooth as possible for a buyer.
Toro Liberty would appreciate the chance to discuss your needs. We help a range of Australian and New Zealand companies to achieve their long term goals - be that through growth capital, acquisitions, a business sale, or strategic advice.