When you’re preparing to sell your business or seeking investment, getting your financial house in order is crucial. A thorough due diligence process is inevitable, and clean, accurate financial records can make or break a deal. Let’s walk through the key steps to ensure your financial records are in top shape for due diligence.
Start Early and Be Thorough
Ideally, you should begin cleaning up your financial records at least 1-2 years before you plan to sell. This gives you ample time to address any issues and establish a track record of clean, consistent reporting. Remember, this isn’t a one-time task – it’s an ongoing process that requires attention to detail and commitment.
Separate Personal and Business Finances
One of the first steps in cleaning up your financials is to ensure a clear separation between personal and business expenses. This separation is crucial for potential buyers or investors to get an accurate picture of your business’s financial health. Go through your records and reclassify any personal expenses that may have been incorrectly attributed to the business.
Organize and Update Your Financial Statements
Buyers typically want to see 3-5 years of financial statements, including:
- Profit and Loss (P&L) statements
- Balance sheets
- Cash flow statements
Ensure these are up-to-date, accurate, and organized. Consider creating a four-column spreadsheet for your P&L, showing “Original” numbers, “Adjustments,” “Normalized” numbers, and “Notes” to explain any changes or unusual items.
Reconcile Your Accounts
Regular reconciliation is key to maintaining accurate financial records. Make sure all your accounts – bank statements, credit cards, accounts receivable, and accounts payable – are reconciled monthly. This process helps identify discrepancies and ensures your financial statements reflect the true state of your business.
Review Your Chart of Accounts
Take a close look at your chart of accounts. Is it too cluttered with unused accounts? Or perhaps it’s too simplified, lacking the detail needed for meaningful analysis? Strive for a balance that provides clear insights into your revenue streams and expense categories without being overly complex.
Address Any Red Flags
Be proactive in identifying and addressing any potential red flags in your financials. This might include:
- Unexplained fluctuations in revenue or expenses
- Inconsistent accounting practices
- Large or unusual transactions
- High customer concentration
Addressing these issues head-on and providing clear explanations will build trust with potential buyers or investors.
Prepare Supporting Documentation
In addition to your financial statements, gather supporting documentation that may be requested during due diligence. This includes:
- Tax returns
- Bank statements
- Major contracts and agreements
- Inventory records
- Fixed asset schedules
Having these documents organized and readily available will streamline the due diligence process.
Consider Professional Help
If financial management isn’t your strong suit, don’t hesitate to bring in professional help. An experienced accountant or financial advisor can provide invaluable assistance in cleaning up your records and preparing for due diligence. Their expertise can help you present your financials in the best possible light and potentially increase your business’s value.
Implement Good Financial Practices Moving Forward
As you clean up your historical records, also focus on implementing good financial practices moving forward. This includes:
- Using reliable accounting software
- Maintaining consistent reporting practices
- Regularly reviewing financial performance
- Keeping detailed records of all transactions
By establishing these habits, you’ll not only make future due diligence processes easier but also gain better insights into your business’s financial health.
Remember, clean and accurate financial records are more than just a requirement for due diligence – they’re a powerful tool for managing and growing your business. By taking the time to get your financials in order, you’re not just preparing for a potential sale or investment; you’re setting your business up for long-term success. To discuss you business with an Advisor, please contact us at in**@************rs.com.
Citations:
[1] https://synder.com/blog/accounting-cleanup/
[2] https://dealroom.net/blog/how-to-conduct-financial-due-diligence
[3] https://www.cfoselections.com/perspective/getting-your-financial-house-in-order-before-selling-your-business
[4] https://www.napolitanoaccounting.com/accounting-best-practices-maintaining-accurate-financial-records/
[5] https://theceosrighthand.co/due-diligence-checklist/
[6] https://morganandwestfield.com/knowledge/preparing-financial-statements-when-selling-a-business/
[7] https://cfoshare.org/blog/how-to-clean-up-business-financial-statements/
[8] https://datarooms.org/vdr-blog/financial-due-diligence-checklist/
[9] https://doeren.com/viewpoint/6-ways-to-clean-up-your-financials-before-considering-a-business-sale
