How Financial Records Affects Your Exit Valuation

17 January 2023

Having accurate, up to date financial records will provide confidence to an acquirer in the key numbers.

advice : Exit, Leadership, Strategy and Valuation

Demonstrating to a buyer that your financial records are clean, accurate and in good order is important to building confidence, and an important part of a business sale process. It is an indication that throughout your business growth you have good quality information to help decision-making and monitoring. 

In a sale process, an interested party will want to see your financial statements and monthly management accounts (P&L and Balance Sheet) going back at least three years.

Having accurate, up to date financial records, that are prepared under Generally Accepted Accounting Practices, will provide comfort and confidence to an acquirer in the key numbers (particularly revenue growth, gross profit, EBITDA) which underpin their valuation assumptions.

How financial records impact the value of your business

One of the most common examples of “untidy” books. Red flags in this area for SMEs commonly include overdrawn Director’s Loan accounts, dividends when there were insufficient distributable reserves and non-business related expenditure. These should be properly accounted for and disclosed during due diligence.

Transactions recorded in your accounts will also give the buyer a deep insight into your spending and areas of investment (especially capital expenditure), ensuring that your company is set for growth and there are no impending expenses due, including for things such as tech, machinery or maintenance.

Aside from direct hard financial data, accounts that are well organised reflect a strong business direction and a data-supported decision-making. This can boost your company’s value in the eyes of the buyer, as they can understand and validate more during due diligence, and less future surprises / unknowns.

Even when poorly kept books are not hiding any “skeletons” a potential buyer can be easily intimidated by the idea of sorting through an accounting mess during due diligence, with only the risk of finding any outstanding figures causing them to walk away.

How to ensure your financial records are ready for an exit

Naturally, your company’s mission, business model and growth momentum will likely be the first aspects to attract a potential buyer’s attention, but success in M&A deals largely depends on a thorough due diligence process, so making sure beforehand that your records are accurate, complete and easily comprehendible is paramount.

This process should start years ahead of a planned exit process, as it takes time to ensure that all records are well-kept, especially if retroactively. Truth be told, the most efficient way of ensuring you are DD-ready is taking great care in maintaining clean financial records as soon as you start trading.

Of course, handing these processes over to an experienced advisor provides you (and a potential buyer) with extra confidence. Get in touch with our team of experts and find out how Finerva can support your business.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.