Tuesday, October 22, 2002 (Part 1): Financial records for the broker

Wow, getting business financial information together for a business broker could be a real problem at many companies. The financial records Marty has asked for are what I expected based on the "How to Sell Your Business" books I've read. The list is very detailed, and includes:

  • Business P&L statements for the last three years
  • Balance sheets for the last three years
  • Income and length of engagement with all of our major customers. He doesn't need customer names, and said we should white-out all the names, changing them to Customer A, Customer B, etc.
  • A business organizational chart. This was the first laugh Jack and I had together in a long time. Org chart? Really?
  • Key employees and job descriptions.
  • Three pages of other questions we had to answer. Again, this is all basic financial information, but it's going to take a while to put it together. I started to think that some of this was just a ruse to see if we are truly committed to this process, but I called Marty, and he told me it's all needed for potential buyers. He doesn't need to see all of it right now for his needs, but potential buyers will need it. He said to skip anything we don't feel comfortable with, but he will definitely need the P&L and Balance Sheet information.

As I started to write, for many small business, getting this financial information together would be a real issue. Think about it -- this information is going to take someone at least a few days to put together, and at the very least, your bookkeeper and/or accountant will have to be involved in the process.

Preparing the financial information

Fortunately my wife oversees the bookkeeping portion of the business, so we just took a recent backup copy of the financial server and set up a computer for her at home. (I handle the backups of the financial server, so again this is easily done.) With my wife getting all the business financial information together off-site, Jack and I met several times to answer the other questions, things like:

  • What was our marketing budget and marketing strategy?
  • What is the average length of a customer engagement.
  • Who are our biggest customers, how long have we been working with them, and how long did we expect these relationships to last?
  • List any long-term contracts we had with customers. (Marty told us buyers love to see customers signed to long-term contracts and recurring revenue.)
  • Describe our history of employee turnover.
  • Who are the key employees? What do they do?
  • Would we stay after the sale? If so, how long?
  • Many more ...

Again, Jack and I didn't see the rationale behind several of these right now, so we just put "Later" on the response we were preparing. (One example is where we didn't think the names of any employees needed to be shared at this time, especially when we had no idea what the company was worth.)

Marty's list also includes two other items that are very interesting:

  • The names of all companies Marty should never contact about selling our business.
  • The names of any companies that we recommend Marty contacting to see if they would be interested in buying a business like ours.

Marty mentioned these points before, but I had forgotten them. In regards to the second list, he did mention to us earlier that any companies he contacted would only see "blinded" information, i.e., basic financial information about our company, and a very generic profile of our size and that we are a computer consulting firm. But there would be no names, and no exact physical location, just that this is "a computer consulting company located in the midwest."

Between my wife, myself, and Jack, we were able to put all this research together without involving anyone else at the company. Since we already had day jobs, putting it all together took almost two weeks. Once we knew we'd be done by a certain date, I called Marty and set up an appointment for the following week.

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