If you’ve ever gone to sell a business, the first thing that the business broker is going to ask for is going to be a set of abridged financial statements. Your accountant can create these for you quite easily. It sounds big and scary, but although it can be time consuming, it’s not that difficult. We take your original set of financial statements, generally only your Profit and Loss Statement and we remove anything that is distinctly relevant to the way that you run your business and the way that someone else may not. There is always a reconciliation to the tax return so that it can be used during the due diligence stage of business sales.
Once the broker has your abridged financial statements, he’ll use them to determine what a likely sale price would be. When we create these Financials, the things that we take out normally are:
- borrowing costs for loans, because if someone else buys your business. They may not have the same loans as you do
- depreciation because the plant and equipment that you have, and the price that you paid for it will be different to what they have, we take out interest on the loans, because new owners figures will be different.
- Motor Vehicles, if the motor vehicles are 100% business, then we leave them in there and buy 100% business I’m talking work trucks, I’m not talking the wife’s car that we claim 100% business, not that we should anyway. We either take out that non business vehicle, or we only take out the private portion of it, it’s up to you which way we want to do it.
- Rent, if you’re paying market value rent for your premises to yourself that’s fine, we leave it in if you’re not, then we make it market value.
- Travel and training, if there’s extra seminars that you may have been to overseas, perhaps that you can claim for tax purposes, but someone else may not do it, then we don’t claim them. The same with training, you may be part of a business group, or you may do some training because you wanted to go and do it. But it’s not absolutely 100% necessary to run your business.
- Wages, we have to make an adjustment for wages for the business owner. If the business owner is working in the business then we need to look at adjusting for a market rate for their services, also looking at related party wages to ensure they are all essential to running of the business. We often just remove the owners wages altogether and allow the purchaser to make their own assumption based on their circumstances of how they will run the business.
When completed, there is a Profit and loss of your business, showing what the situation would be if a prospective purchaser walked in tomorrow. This allows them to make their own assumptions regarding the expenses removed and ultimately value your business.
Abridged Financial Statements are used to give to potential buyers of businesses and business brokers so they can determine the sale price and have a starting conversation with the buyer.