The Importance of Financial Statements in the Exit Planning Process

Whether you plan to transfer your business to an insider or sell to a third party, demonstrating your company’s financial stability through sound financial statements is a crucial step in successfully exiting your business. When you first meet with an Exit Planning Advisor, he or she will want to determine your company’s current financial status, an assessment that involves reviewing:

  • Business tax returns for the previous two to three years
  • Current financial statements of the business
  • Your personal financial statements

Does your Exit Planning Advisor need your company’s financial statements at your initial meeting?

Yes. He or she needs a clear and comprehensive understanding of your financial picture for several reasons.

First, the company’s financial statements not only allow your advisor 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 advisor identifies areas in your business that need strengthening, he or she can suggest and help you implement strategies to create a positive cash flow trend or 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.

Third, and most importantly, financial statements provide cash flow information which we can use to determine both the value of your company and its possible sale price. Financial statements show you and your advisor the historic earnings, cash flow results and past years’ trends.

Historic results and trends can be indicators of your company’s future performance. In short, we need this information to estimate what you can reasonably expect to receive for your company.

Finally, reviewing your financial statements with your advisors will help to dispel any misconceptions you may have about your company’s value and the likelihood of growing value quickly. For instance, you may believe that recent improvements will double cash flow and company profits over the next couple of years. Your advisors, 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 advisor. 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 advisor. 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 advisors. 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.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Scott Brittman