This article are provided for information purposes only, and are not intended as legal advice.

When do you sell a business, before or after you issue financial statements?

December 19th, 2008

Many businesses for sale hope that they will have one good year and will wait until the annual financial statements are prepared.  Remember, in good times, typically you look at 3 years earnings and average the profits in order to ensure that the earnings are on going and not just a result of 1 large contract.  Since the earnings are averaged, you will only get recognition for 1/3 of the profit increase.  But if sales are dropping in the current economy, someone will place more of a reliance on current financial statements and a projection until the end of the year.  Remember, when your accountant prepares your financial statements, it will take him 30 days to 6 months to issue the financial statements.  You are then part way through the next year so you will always have to deal with internal financial statements. The buyer of the business will always be looking at the internal financial statements.

With the current economy, it does not matter if last year was a good year if this year is a weak year.  Reliance will usually be weighted more toward what you are doing today rather than the past if the earnings are lower this year than in the past three years.  Buyers of businesses usually look at the lower of the last three years profits or the current year if it is weaker.  If the last year was weaker, there is a greater weighting on the lower year because that will usually indicate the business has changed.

Filed under: Sell a business — Gary Landa @ 10:02 am

1 Comment »

  1. financial franchise…

    Interestingly, this was on CNN last week….

    Trackback by financial franchise — January 7, 2009 @ 3:06 am

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