When business owners think about preparing their company for a future sale, they often focus on revenue growth, profitability, customers and operations. Those factors matter, but there is another part of the business that can have a significant impact on how a buyer evaluates the company: the accounting function.
Strong accounting systems do more than record what happened. They provide a reliable financial history, help management make informed decisions and give potential buyers the information they need to evaluate the business.
A 2024 Journal of Accountancy report found 27% of finance leaders cited clunky spreadsheets as a reason they did not fully trust their organization’s financial data, while 25% cited outdated processes, including manual data collection.
For an owner considering a sale in the next several years, building strong accounting practices early can make the eventual process much more manageable.
For CEOs and owners, the takeaway is straightforward: the quality of your accounting can influence how well a buyer understands the business you have built.
So, what does strong accounting actually look like?
Monthly Financial Statements
A well-run accounting function produces monthly financial statements that include an income statement, balance sheet and cash flow statement.
Timing matters as well. Financial statements prepared within five to 10 days after month end demonstrate an established accounting process and give management timely information about the business.
A consistent monthly history also allows an owner to identify trends, understand seasonal patterns and maintain rolling twelve-month financial statements. When a buyer begins reviewing the company, having this information organized and readily available can make the financial review more productive.
Monthly Account Reconciliations
The general ledger should be reconciled regularly, with supporting documentation for significant balances.
Many accounting issues can remain hidden within balance sheet accounts when reconciliations are delayed. Regular reconciliation helps identify errors, unusual transactions and discrepancies while they are still relatively easy to address.
This becomes particularly important during a buyer’s Quality of Earnings review. A buyer and their advisors will examine the financial records closely, and organized supporting documentation can help answer questions efficiently.
Consistent reconciliations also benefit the company’s CPA when preparing tax returns and financial statements.
Gross Margin by Revenue Stream
Revenue tells part of the story. Buyers also want to understand how the company generates its profit.
Reporting gross margins by product, service, customer group or other meaningful revenue categories can provide valuable insight into the business.
For example, a company may have several revenue streams that appear equally attractive at the top line. Once direct costs are properly allocated, one may produce significantly stronger margins than another.
Understanding those differences helps management make better decisions about pricing, resource allocation and future growth. It also helps a potential buyer evaluate which parts of the business offer the greatest opportunity.
Budgeting and Forecasting
A thoughtful budget and regular forecasting process can tell a buyer a great deal about how the business is managed.
Forecasting requires management to understand revenue drivers, expenses, staffing needs, capital requirements and other factors that influence financial performance.
Buyers will develop their own financial models during an acquisition, but a well-supported company forecast gives them useful information about how management views the future and what assumptions support expected performance.
It can also highlight areas where actual results differ from expectations, creating an opportunity for management to explain the reasons behind those changes.
CPA Reviewed or Audited Financial Statements
The level of financial statement assurance can also matter during a transaction.
Financial statements that have been reviewed or audited by a CPA can provide additional support for the company’s reported financial results. Ideally, owners considering a sale can establish this history two or three years before going to market.
Tax returns serve an important purpose, but they do not provide the same level of detail a buyer may need when evaluating a company. Compiled financial statements can also leave buyers with additional questions during due diligence.
Establishing a strong financial reporting history before a sale gives the buyer a better record to evaluate and can reduce some of the questions that arise during the transaction process.
Strong Accounting Is Part of Building the Business
Accurate books, timely financial statements, reconciled accounts, meaningful margin reporting, thoughtful forecasting and appropriate CPA involvement create a financial foundation that serves the company long before a buyer arrives.
If a future sale is part of your plans, start looking at your financial systems now. There may be opportunities to strengthen the reporting, documentation and processes that will eventually become part of the buyer’s evaluation.
Norris CFO Partners is here to help business owners strengthen their financial operations, improve reporting and prepare for the opportunities ahead.