How do I normalize my financial statements for business valuation and sale?
One of the most important sources of information that prospective buyers will use, when considering a potential purchase of your business, is your company’s financial statements. If they are unaudited, it is highly advisable to upgrade the quality of the financial statements to an audit for at least three years prior to listing your business for sale. Audited statements (or, at a minimum, “Review Engagement” financial statements) may also be advantageous when seeking financing from a financial institution.
Benefits of Audited Financial Statements
Audited financial statements offer the greatest level of assurance regarding the accuracy of the information. As a result, the financial information for your business will have more credibility in the eyes of the buyer, and may result in a higher perception of the overall value of your company.
Normalizing Financial Statements for Business Valuation
In order to assess the likely future performance of your business, the financial statements must first be “normalized” to account for fluctuations in revenue, gross profit percentages, and expenses from year to year.
The historical financial statements are normalized to show the true profitability of a business by taking a comprehensive look at a number of variables and adjusting accordingly. These variables include:
- Uneconomic management remuneration and bonuses;
- Salaries paid to non-working family members;
- Benefits paid on the owner’s behalf that would likely not be incurred by a buyer; and
- Non-recurring expenses, such as legal fees or settlements and one-time restructuring or business relocation costs.
By eliminating anomalies and non-recurring or unusual items, the adjusted income statement will present a much more accurate picture of the company’s maintainable profit level when determining the value of the business.
To learn more about how Fuller Landau can help you to obtain a normalized, accurate business valuation, contact us today for a complimentary consultation.