Why is That Profit & Loss Statement So Important?
Generally, buyers of a business are looking for cash flow, which, for this discussion concerning small/midsize businesses, is more appropriately referred to as Discretionary Earnings. Whether the buyer is an ex-corporate individual who is essentially buying a job, or an investor whose interest is to build a business to sell down the road, or a strategic buyer interested in adding onto an existing business for numerous reasons, the buyers are looking for additional cash that will contribute to their bottom line. And that information is gathered from a thorough evaluation of the Income Statement, also called the Profit & Loss, and often expressed as P&L.
As you can imagine, in most cases, the business with higher discretionary earnings will be more valuable in the eyes of potential buyers. If you are thinking of selling your business, whether you want to sell now or in the future, it is important to make certain the P&Ls for your business accurately reflect the true revenues earned and the true expenses necessary to earn those revenues.
I have seen various oddities when looking at the P&Ls some business sellers have given me. For example, after studying the P&L for a seller, I saw some expenses I knew could not be correct. With the seller’s permission, I looked at his accounting software and found that the bookkeeper had mistakenly double expensed payroll taxes for the entire year, rendering a bottom line that was five figures too low. Since the discretionary earnings have a significant influence on the selling price of a business, this business could have been under priced by a healthy six figure amount. Lucky for this seller I found the problem.
In my next blog I will discuss some things to keep in mind concerning your financial statements and selling your business.