Blog: Preparation of Seller Financials Before an M&A Process

If you read the headline above and asked, “isn’t that obvious”, the answer is a definitive “no” to many sellers.

I can’t tell you how many times when reviewing a company how a seller’s financials were problematic from an accounting and compilation perspective.  As a seller, you don’t want to get into a sell-side process to a reputable buyer that is ready to pay top multiple for a desirable target, and have the seller say, “really like the business, the problem is, we don’t know if your financials actually are what you say they are…..no, don’t get us wrong, we’re not saying you’re intentionally doing anything wrong, but it’s clear they weren’t compiled properly in a number of areas……now we have to doubt the numbers in general.”  This is the last thing on earth a seller wants, and it happens a lot.

A company can be profitable, growing and fundamentally attractive—and still create problems in an M&A process if its financial records are incomplete or difficult to understand.  Buyers need to understand not only revenue and EBITDA, but also how earnings translate into cash flow, what the company owns and owes, its working capital requirements, and whether historical results can be reconciled across the financial statements and tax returns.

When financial information is incomplete or inconsistent, buyers have to spend more time determining what the business actually earns. That can slow diligence, raise questions about the reliability of reported EBITDA, complicate financing and ultimately affect valuation or deal terms.

Business owners considering a sale should therefore begin preparing well before going to market; sellers should retain an experienced and reputable accountant.  Clean income statements, balance sheets and cash flow statements—supported by consistent accounting records—can make a significant difference.

In M&A transactions, strong financial statements don't just provide a financial snapshot of the business, they help a buyer gain confidence in paying full fair market value without need for discount.

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