Whether you are thinking about selling your company in the current year or just want to make sure you are prepared in case an unsolicited offer appears at your doorstep, getting your financials in order, especially your balance sheet, is of utmost importance, and January is the perfect month to do it.
Be sure to read our blog on the optimal time to sell your company and when you should be working on preparing.
Clean balance sheets are appealing to prospective buyers, so a sudden tidy-up can sometimes be a signal that a company is readying itself for a potential sale. Therefore, if you don’t want to tip off your accounting department that something is up, you might just want to make it part of your year-end “clean up and get ready to do the tax return” process.
Most accountants are still making year-end adjustments and preparing the financials for the tax accountants, who then make their own year-end adjustment for things like depreciation and other book to tax adjustments. But many times, these adjustments are just for that [tax return] purpose and don’t necessarily clean up the balance sheet.
However, prospective buyers like to see clean balance sheets. It indicates a well-run company to them.
I see a lot of financials as part of preparing my clients for a transaction, and there ALWAYS seems to be some clean-up that needs to be done. Therefore, I thought I would put together a list of the most common items that need to be addressed on a typical balance sheet, and one very special tip at the end.
Here are my top 5 most common cleanup items I come across when reviewing the balance sheet of my clients:
1. Accounts Receivable Aging’s with lots of little and some large balances beyond 120 days.
Who likes to clean up old, small AR balances? Virtually no one. It’s time consuming and usually not worth the effort; except all balances over 90 days will NOT be included in your working capital calculation, which is done right before the deal closes. Now is a good time to clean up those amounts and pull in old receivables.
2. Fixed Assets that are no longer in use.
Remember that car you bought 10 years ago and handed down to one of your kids, but didn’t take off the books? Or the laptops that aren’t being used anymore or are fully depreciated and nowhere to be found? Now is the time to take stock of your electronics and larger purchases and remove those no longer being used by the business. Even if you don’t track depreciation on your books because your tax accountant has expensed everything, you still need to have a fixed asset listing when you get ready to sell the company.
3. Personal or family loans that have been there forever.
Almost every business owner at some point has taken a minor (or major) loan from the company. Or, you may have made a loan to a family member or long-term employee that was forgiven. Again, now is the time to write those off or reclass as a distribution.
4. Deposits that no one has an idea of what they are.
This could be either on the asset or liability side. If you have a deposit amount showing in the general ledger any prospective buyer will want to know what that is. On the asset side, it may be your last months’ rent that was done years ago, on a space you don’t use anymore, but you didn’t clean up that amount on the balance sheet. On the liability side, it may be an amount given to you in advance by a customer for work, in which case you will need to be able to show exactly who and how that will be earned.
5. Updating deferred revenue accounts.
Not everyone uses a deferred revenue account throughout the year, but they do update it at the end of the year for either tax or book purposes. This is also a clean and easy way to record deferrals ONCE a year instead of flipping them each month, if that makes things easier. Either way, you should reconcile and update your deferred revenue amounts due to customers paying you in advance.
Finally, I have one special tip to share with you.
This one seems to bite a lot of people in the behind at the very last minute, and that is cleaning up UCC liens. Almost every company either takes out a loan, has a line of credit (doesn’t matter if you use it or not), or leases some equipment, then terminates those debt instruments…but the lien is still sitting out there because someone didn’t take the extra step to clean it off the public record. Unfortunately, this will hold up your deal until it is cleared out, especially if it is a stock transaction. I would look now, because it takes a while to remove these and you don’t want to have to deal with it at the 12th hour.
Here is a site where you can check to see if your company has any liens (U.S. only): https://www.nass.org/business-services/ucc-filings. Just enter your official company name and state where you are incorporated, and a search will be done with results immediately.
Want to learn more financial tips about getting your company ready to sell? Be sure to read my chapter on Financial Fitness in my book: Get Acquired for Millions. I go into more detail on all aspects of your financials.
I hope you found value in this post.