A successful transaction begins long before the purchase agreement is signed.

Buying or selling a business can be one of the largest financial decisions an owner will ever make.

For a seller, it may represent the culmination of decades of work and a significant portion of personal wealth. For a buyer, it may represent an opportunity to grow faster, enter a new market, add capabilities, or begin a new chapter.

Either way, enthusiasm about the opportunity can make it tempting to jump quickly to the big question:

What’s the business worth?

That’s an important question—but it isn’t the only one.

Before discussing purchase price, financing, deal structure, or closing dates, buyers and sellers need to understand the numbers behind the business. And that requires looking beyond a single year’s revenue or net income.

At Stanaland Dodson & Associates LLP, we help business owners evaluate transactions from the financial side. The goal isn’t simply to arrive at a number. It’s to understand what is driving that number, identify potential risks and opportunities, and help owners make informed decisions before they commit to a transaction.

For Sellers: Your Financials Help Tell the Story of Your Business

A prospective buyer isn’t purchasing your company’s history. The buyer is purchasing an expectation of future earnings and cash flow.

Your historical financial information helps support that expectation.

Several years of consistent, reliable financial statements can help a prospective buyer understand:

• Revenue and profitability trends
• Gross margins
• Operating expenses
• Cash flow
• Customer and revenue concentration
• Debt and other obligations
• Capital expenditure requirements
• Working capital needs

But the numbers rarely tell the entire story by themselves.

Perhaps profitability declined because you made a significant investment that is now beginning to produce results. Maybe a large one-time expense affected a particular year. Perhaps the company owns assets that aren’t necessary to its operations, or the owner’s compensation and benefits would look different under new ownership.

Understanding those details helps explain the economics of the business more clearly.

That’s one reason preparation matters. The time to organize your financial story is not after a buyer has already started asking questions.

Clean Financial Information Can Make a Difference

Imagine two otherwise similar businesses for sale.

One has timely financial statements, clearly documented expenses, consistent accounting practices, organized records, and several years of financial information that can be readily explained.

The other has financial statements that require significant cleanup, personal and business expenses that are difficult to separate, unexplained changes between years, and information that takes weeks to assemble.

Which transaction is likely to inspire greater confidence?

Reliable financial information doesn’t guarantee a particular selling price, but it can make it easier for a prospective buyer, lender, and other advisors to understand the business.

It can also make the due diligence process considerably smoother.

For owners who believe a sale may be several years away, that creates an opportunity. There is time to improve financial reporting, address inconsistencies, document processes, and identify areas that may affect value.

For Buyers: Revenue Doesn’t Tell You What You’re Buying

Buyers can become understandably excited about growth opportunities.

A company with $5 million, $10 million, or $20 million in revenue may look attractive at first glance. But revenue alone says very little about the quality of the business.

A buyer needs to understand what produces those sales—and what it costs to produce them.

For example:

How much of the revenue comes from one customer?

Are margins improving or declining?

How dependent is the company on the current owner?

Will significant equipment need to be replaced soon?

Are receivables being collected consistently?

Is the business generating enough cash to support both operations and acquisition debt?

Does the company have recurring revenue, long-term contracts, or predictable customer relationships?

A business can look profitable on paper while requiring significant cash to fund inventory, receivables, equipment, or other working capital needs.

That’s why a buyer should understand not only earnings, but also how those earnings translate into cash.

Look Beyond the Income Statement

The income statement tends to receive the most attention in a business transaction, but some of the most important information may be elsewhere.

The balance sheet can reveal significant information about the company’s financial health.

A buyer may need to examine:

• Accounts receivable and the likelihood of collection
• Inventory levels and potentially obsolete inventory
• Existing debt
• Equipment and other fixed assets
• Accounts payable
• Accrued liabilities
• Working capital

These items can directly affect both the value of the transaction and the amount of cash needed after closing.

For sellers, reviewing these areas well before a transaction can uncover issues that are easier to address today than during due diligence.

Understand What Is Driving Profitability

Not all earnings are created equally.

A business may have strong overall profits while certain products, customers, locations, or divisions perform very differently.

For a buyer, understanding those differences can help answer an important question:

What exactly am I paying for?

For a seller, the same analysis may identify opportunities to strengthen the business before going to market.

Perhaps one division consistently generates higher margins. Maybe a handful of customers account for a disproportionate share of profits. Or perhaps one service line produces substantial revenue but very little return.

Those insights can be valuable whether a transaction happens next year—or never happens at all.

The Purchase Price Is Only Part of the Deal

A $5 million offer is not necessarily the same as another $5 million offer.

How the transaction is structured can significantly affect the economics for both buyer and seller.

Questions may include:

• Is this an asset sale or an equity sale?
• How will the purchase price be allocated?
• Will the seller receive all cash at closing or payments over time?
• Will there be an earnout?
• Is the seller financing part of the transaction?
• How much working capital will remain in the business?
• Will the buyer assume certain liabilities?
• What are the tax consequences of the proposed structure?

This is where purchase price and proceeds can become very different concepts.

For a seller, the question isn’t simply, “What am I being paid?”

It’s also, “What will I keep after taxes, debt repayment, transaction expenses, and other obligations?”

For a buyer, the question isn’t simply, “Can I afford the purchase price?”

It’s also, “Can the business generate enough cash to operate, invest, and service the debt after I own it?”

Those questions should be considered before the transaction structure is finalized.

Valuation Provides Context—Not a Crystal Ball

We discussed business valuation earlier this year, and an acquisition or sale is one of the clearest situations where understanding value becomes important.

Valuation can help owners evaluate a proposed transaction, but it is important to remember that value and price aren’t always identical.

A company’s value can be influenced by factors such as:

• Historical and expected earnings
• Cash flow
• Customer concentration
• Industry conditions
• Management depth
• Dependence on the owner
• Recurring revenue
• Competitive position
• Assets and liabilities
• Growth opportunities
• Risk

The eventual purchase price may also reflect strategic considerations unique to a particular buyer or seller.

Understanding the financial foundation gives both sides better information for evaluating the deal.

Due Diligence Should Confirm the Story

By the time a buyer enters serious due diligence, there is usually already a story about the business.

The company is growing.

The customers are loyal.

Margins are strong.

The equipment is in good condition.

There are opportunities for expansion.

Due diligence is where the buyer determines whether the financial information supports that story.

That doesn’t mean approaching every transaction expecting to find a problem. It means verifying the assumptions underlying an important investment.

For sellers, thoughtful preparation can make that process much less disruptive. If financial records are organized and potential questions have already been considered, the company can respond more efficiently when requests begin arriving.

Bring Your Advisors Into the Conversation Early

Business transactions involve far more than accounting.

Attorneys, bankers, insurance professionals, wealth advisors, valuation professionals, and other advisors may all play important roles depending on the transaction.

Your CPA should be part of that team early in the process.

At SDA, our role often involves helping clients understand financial performance, evaluate assumptions, consider tax consequences, assess transaction structures, and work alongside the other professionals involved in the deal.

The earlier those conversations begin, the more opportunity there is to evaluate alternatives.

Once documents are signed and terms are finalized, some options may no longer be available.

The Best Transaction Is an Informed One

Not every opportunity should become a deal.

Sometimes the numbers confirm that an acquisition makes sense. Sometimes they uncover risks that need to be reflected in the terms. Sometimes they reveal that a seller would benefit from spending another year or two strengthening the business before going to market.

And sometimes they lead everyone back to the negotiating table.

That’s not a failure of the process.

That’s the process working.

The purpose of financial analysis isn’t to make the decision for the business owner. It’s to provide the information needed to make that decision with greater clarity.

Start Before You’re Ready to Buy—or Sell

One theme has appeared repeatedly in our conversations with business owners: more time usually creates more options.

If you expect to sell your business someday, you don’t need to wait until you’re ready to list it to begin preparing.

If growth through acquisition is part of your strategy, you don’t need to wait until a business becomes available to determine what you can afford, how you might finance it, or what makes an attractive target.

Start with the numbers.

Understand where you stand. Know what matters. Identify the questions that need to be answered.

Then, when the right opportunity arrives, you can evaluate it from a position of preparation rather than urgency.

At Stanaland Dodson & Associates LLP, we work with business owners throughout Winston-Salem and North Carolina as they evaluate acquisitions, business sales, valuations, tax considerations, and other significant financial decisions.

It’s another way we help our clients look Beyond the Bottom Line.

Stanaland Dodson & Associates LLP
Certified Public Accountants | Winston-Salem, NC

(336) 765-2817
info@sdallp.com
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