The Importance of Financial Statements in the Exit-Planning Process

By Paul Honeycutt, CFP® Practitioner, and Ronald Smith, CLU®, ChFC®

financial

Whether you plan to sell your business to an ESOP or to a third party, demonstrating your company's financial stability through sound financial statements is a crucial step in successfully exiting your business. When you first meet with an exit-planning advisor, he or she will want to determine your company's current financial status, an assessment that involves reviewing:

  • Business tax returns for the previous two to three years
  • Current financial statements of the business and
  • Your personal financial statements

Does your exit-planning advisor need your company's financial statements at your initial meeting? Yes. He or she needs a clear and comprehensive understanding of your financial picture for several reasons.

First, the company's financial statements not only allow your advisor to understand your current financial position, but enable him or her to effectively gauge what you have already accomplished and what remains to be accomplished to create a successful exit plan. As your advisor identifies areas in your business that need strengthening, he or she can suggest and help you implement strategies to create a positive cash flow trend or increase profits. The goal: to achieve your overall exit objectives.

Second, your financial statements provide much-needed insight into what makes your business tick and what criteria you use to base all of your financial decisions.

Third, and most importantly, financial statements provide cash flow information which can be used to determine both the value of your company and its possible sale price. Financial statements show you and your advisor the historic earnings, cash flow results and past years' trends.

Historic results and trends can be indicators of your company's future performance. In short, this information will be needed to estimate what you can reasonably expect to receive for your company.

Finally, reviewing your financial statements with your advisors will help to dispel any misconceptions you may have about your company's value and the likelihood of growing value quickly. For instance, you may believe that recent improvements will double cash flow and company profits over the next couple of years. Your advisors, however, will also look at your company's historical trends to determine whether past cash flow activity supports your belief.

In short, the starting point for sound exit planning begins with reviewing well-prepared financial statements.

honeycutt Article presented by Paul Honeycutt, CFP® Practitioner, and Ronald Smith, CLU®, ChFC® who are Registered Representatives and Investment Adviser Representatives with/and offering securities and advisory services through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser, and members of Business Enterprise Institute's Network of Exit Planning ProfessionalsTM. Send questions to paulh@honeycuttsmith.com or visit www.honeycuttsmith.com. ©2012 Business Enterprise Institute, Inc.