When it comes to
selling your business, preparation is everything and it must start years beforehand.
There are a number of key elements that require focus:
- Establishing the business’ story (history, current standing and prospects)
- Selecting the right accounting policies
- Ensuring that your tax position is correct
- Being ready for due diligence
This paper summarises the accounting policies and raises points that you will need to consider to ensure that your profit and loss account is positioned in the best light. There are separate article on the balance sheet and related matters and other areas of your business that you should focus on.
Revenue
Revenue recognition tends to be one of the riskiest areas within the accounts and therefore very careful analysis of revenue in regards to: returns, credits, cut-off, warranties, staged-deliveries, staged, retention work, project work, currency exposure and any other special legal terms or rights offered.
Cost of sales
Consider what really are cost of sales and distinguish these as best as possible from administrative costs. This will ensure that the gross profit margin is being accurately computed.
Salary costs
Ensure that salary costs relating to other areas of the business ie cost of sales, sales or distribution are allocated to these areas.
Non-trading costs
Ensure that these are clearly distinguished ie share based costs and interest payable.
Depreciation and amortisation
Ensure that these are computed accurately and clearly distinguished. Potential acquirers often use EBITDA as a proxy measurement of valuation.
Capitalisation
Ensure that your fixed asset capitalisation policy is being applied consistently. Typically companies will capitalise all assets over a certain value.
Stock
Scrutinise your method of valuation; and ensure that stock takes are regular.
WIP
Ensure that you consider your normal level of recoverability when valuing WIP.
Industry specific accounting policies
Apply them where practical and ensure that the accounting policy sufficiently describes these.
Exceptional costs
Although these are now deemed to be part of the trading costs, there is nothing to stop you including analysis and disclosure to explain the exceptional nature of certain costs.
Full disclosure
More disclosure is better than less. Information allows potential acquirers to keep track of progress.
Concluding comments
The above are just some of the areas within the profit and loss account that require focus. However, every company has its unique profile and it would be worth critically
reviewing all corners of your P&L.