Not only will you need to provide information from your financial statements to effectively market your practice, but you will also need to provide a full set of financials to the Buyer for due diligence purposes, as well as to the lender, if the practice acquisition is being financed. It’s very important to keep your financial statements updated throughout the sale process and in a proper format. A clean, cash & accrual-based income statement segmented by service line will significantly improve Buyer confidence and lender underwriting speed. The most common reports requested are an income statement, Balance Sheet, monthly Cash Flow and A/R aging.
Accurate financials are critical when selling your firm. Whether you use cash or accrual accounting is immaterial, instead you’ll need to be able to produce an accurate picture of your annual revenue and being able to explain, and make adjustments, for any irregularities (e.g., prior billing issues, inflating or delaying current year revenue, etc.). Refusing to share financials with a buyer or their lender can derail a sale entirely. Without transparency, your only option may be to offer 100% seller financing with no upfront payment and future payouts tied to client retention.
Even seasoned professionals can neglect their own firm’s financial housekeeping. Before going to market, a second set of eyes on your books can streamline the process and enhance value. Clean up any negative balances in expense accounts, bank accounts, asset, or A/R. If you record discounts, allocate them to the appropriate income categories rather than lumping them into a single account. Misclassified or inconsistent revenue and discount reporting can create confusion for buyers. Review your balance sheet carefully to ensure loan balances are current, depreciation is accurate, petty cash is accounted for, and undeposited funds are reconciled etc. Lastly, and, this should go without saying, although we might be a little lax on distributions, vs shareholder loans and retained earnings, please be sure your retained earnings ending balance is the same as the beginning balance in the following year. These are basic practices, but in a sale, precision matters.
Don’t overlook your expenses, they matter. You’re not simply selling revenue; you’re also selling the effort and expenses necessary to deliver those services. Overhead reflects how the firm operates and must be evaluated as part of the overall value. While certain discretionary expenses may be added back to enhance projected cash flow, we’ll explore this under Seller’s Discretionary Earnings later, they are limited in scope and must be justifiable. Expenses should be consistent with industry norms to demonstrate a well-run operation and help buyers assess potential synergies and areas for efficiency, plus expenses can show potential liability with penalties, legal fees, higher insurance costs, etc. Additionally, lenders scrutinize expenses during acquisition financing, and they may be an indicator of operational risk, inefficiency, and delivery issues.