Many business owners slight their balance sheet and often times do not even understand it.
You do not need to be an accountant or CPA to comprehend your balance sheet. Think about it as your company scoreboard. It tallies up all of your value (assets) and negative value (liabilities) to provide your current score (your equity in your business).
A strong balance sheet projects a well-run company and a strong equity section communicates how much profit you have earned over the history of your company.
During a transaction it plays a much bigger role. It becomes your financial messenger.
It provides a line of sight for buyers to evaluate the following questions:
- How much cash does this company have?
- How much is in AR?
- Does the company record AR bad debt allowances?
- Is the AR balance correctly supported by a subsystem?
- How many days sales are in AR?
- How old are the receivables?
- How much does the company carry in inventory?
- Is the inventory properly values including adjustments for shrinkage and obsolescence?
- Does the company incur and record prepaid assets?
- What does the company have in fixed assets at gross and net?
- Does the company record long-term assets?
- How much is in AP?
- Is the AP balance correctly supported by a subsystem?
- What is the composition of current liabilities?
- What is the ratio of current assets to current liabilities?
- Is the company’s accounting correct between short-term and long-term liabilities?
- Does the company have a lot of debt?
- Are reserves recorded for future expenses such as loss contingencies or warranty reserves?
- Do the owners leave plenty of cash in the company for operating needs and dips or do they drain out every possible dollar out through compensation and distributions?
- Does the current year income agree between balance sheet and P&L?
- Is the balance sheet in balance? Sounds rhetorical but this is an issue far too often.
- What overall message does the balance sheet send about liquidity and financial strength?
- Are there amounts on the balance sheet that the owners cannot immediately speak to?
This is just a sample of the questions and concepts that a thorough balance sheet review generates. Many times, a poor balance sheet exposes and embarrasses a seller.
A financially strong M&A advisor will do the first analysis and get you fully advised BEFORE any external eyes see your balance sheet. Do not underestimate the criticality of this financial statement and its need for clarity and correctness. More that likely you are doing an asset sale so your balance sheet is the foundation of your entire sale.