What Financial Documents Are Needed to Sell a Business?

Profitable financials indicate a sound business operation and a better purchase opportunity.

Profitable businesses sell quickly because business owners prove to buyers that their businesses are profitable entities. Business owners selling their businesses need to prepare and present specific financial documents representing their businesses' financial health. The seller’s accountants will request this information to evaluate the business. Financial documents include the proposed selling price offer, tax records, the business’s debt records and the business’s balance sheets.

Selling Price

Financial documentation to support a business's selling price is vital. It shows the buyer that the sales price is a true appraisal of the business's value. The sale price package should include financial documents such as a balance sheets demonstrating the value of each business asset included in the selling price. Buyers will verify that the business's asset valuations in areas such as real estate, equipment and inventory are at their current market prices.

Tax Records

A full review of a business’s federal tax returns is a standard practice when purchasing a business. Businesses must declare their yearly net profit or loss to the U.S. Internal Revenue Service for tax purposes. Accountants review business tax records to define a business’s true value because of the need for accuracy within a tax return. Information included within a federal business tax return includes business operating expenses, depreciation on business assets, interest debt and the owner’s compensation.

Debt Records

Business buyers have to establish the cost of assuming any of the business’s current financial obligations or debt, including unpaid accounts payable balances and current loans. An analysis of a business’s debt records and accounts payable balances helps buyers establish a business’s current debt obligations. It also establishes a business’s reliance on debt to finance its operating expenses.

Balance and Income Statements

Business buyers will expect to see a business’s balance and income statements. Most accountants will require at least three year-end statements and an interim current year statement. Accountants compare and confirm balance and income statements with federal business tax returns to establish a business’s real market value. Based upon this information, accountants can advise buyers whether additional working capital is required to operate the business after its sale. Reviewed financial statements include balance sheets, income statements and cash flow statements.

References

• Arkansas Small Business and Technology Development Center: Buying a Business -- A Checklist
• The American Institute of Certified Public Accountants: What Do Users of Private Company Financial Statements Want?
• University of Philadelphia: Steps to a Basic Company Financial Analysis
• U.S. Department of Agriculture: Working With Financial Statements
• Maryland Small Business Development Center: Seven Steps to Buying a Business