Where to start? Business owners who have not been through an exit planning process, and many of them have not, are often unsure about how we begin and what information is important. Whether you plan to transfer your business to an insider, sell to a third party or simply retain your ownership indefinitely, demonstrating your company’s financial ability through sound financial statements is a critical step in planning for a successful future for your ownership interest. When you first meet with an exit planning adviser, he or she will want to determine your company’s current financial status, an assessment that involves reviewing:
Does your exit planning adviser need your company’s financial statements at your initial planning meeting?
- Business tax returns for the previous two to three years;
- Current financial statements of the business; and
- Your personal financial statements.
Yes. He or she will refer to your financial statements throughout your relationship, using them at first to get an initial, but still comprehensive, understanding of your business. As you work through identifying your goals and objectives and then evaluating potential planning opportunities, your advisers will use your financial statements as a reference to guide you through a planning process, and to refine planning ideas and their expected impact on your business.
What are we looking for?
First, the company’s financial statements not only allow your adviser to understand your current financial position, but enable him or her to effectively gauge what you have already accomplished and what remains to be accomplished to create a successful exit plan. As your adviser identifies areas in your business that need strengthening, he or she alone or in collaboration with other advisers can suggest and help implement strategies to create a positive cash flow trend or to increase profits. The goal: to achieve your overall exit objectives.
Second, your financial statements provide much-needed insight into what makes your business tick and what criteria you use to base all of your financial decisions. For example, your past decisions to increase or decrease company debt, invest in intellectual property development or reduce inventory may tell your adviser about the state of your business, your industry or your strategic plans.
Third, and most importantly, financial statements provide cash flow information which can be used to determine both an estimate of the value of your company and its possible sale price. Financial statements show you and your adviser historic earnings, cash flow results and past years’ trends.
Historic results and trends can be indicators of your company’s future performance. Your adviser should work closely with you to understand how those results and trends are likely to affect the future. In short, we need this information to estimate what you can reasonably expect to receive in total value as a result of your ownership interest leading up to and through your eventual exit.
Unrealistic … Who me?
Finally, reviewing your financial statements with your advisers will help to dispel any misconceptions you may have about your company’s value and the likelihood of growing value. For instance, you may believe that recent improvements will double cash flow and company profits over the next couple of years. Your advisers, however, will also look at your company’s historical trends to determine whether past cash flow activity supports your belief.
In short, the starting point for sound exit planning begins with reviewing well-prepared financial statements.
If you have any questions about the importance of financial statements in the exit planning process, please contact us to discuss your particular situation.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial adviser. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial adviser. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit planning is a discipline that typically requires the collaboration of multiple professional advisers. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420, or email [email protected].