Selling a business is a significant decision that requires careful preparation. One of the most important aspects of this process is preparing accurate financial statements for selling a business.
These documents provide potential buyers with a clear picture of your business’s financial health, helping them assess profitability, risks, and future potential.
At a minimum, you will need profit and loss statements, balance sheets, and cash flow statements for the past few years. Having well-organised and transparent financial records can increase buyer confidence, speed up negotiations, and help secure the best possible sale price for your business.
What Financial Statements Are Required When Selling a Business in Australia?
When selling a business in Australia, financial statements serve as proof of the business’s performance and value. The key financial statements you should prepare include:
1. Profit and Loss Statement (P&L)
Also known as the income statement, this document shows your business’s revenue, expenses, and net profit over a specific period—usually the past three to five years. Buyers rely on this to understand how much money the business makes and whether it operates at a profit or loss.
2. Balance Sheet
The balance sheet provides a snapshot of your business’s financial position at a given point in time. It details assets (such as cash, equipment, and inventory), liabilities (loans, debts, and unpaid bills), and owner’s equity (the business owner’s investment). A healthy balance sheet reassures buyers that your business is financially stable.
3. Cash Flow Statement
A cash flow statement tracks the movement of money in and out of the business. It is essential for buyers because it highlights how well the business manages its cash and whether it has enough liquidity to cover daily expenses.
4. Tax Returns and BAS Statements
Buyers often request Business Activity Statements (BAS) and tax returns for the past three to five years. These help verify revenue figures and ensure compliance with Australian Taxation Office (ATO) requirements.
5. Inventory and Asset List
An inventory list shows the value of goods available for sale, while an asset list details valuable equipment, property, or other assets included in the sale. These records help buyers assess the true worth of the business.
6. Accounts Receivable and Payable Reports
These reports provide insight into outstanding invoices and debts. Buyers want to know if there are overdue payments or financial obligations they will need to handle after purchasing the business.
7. Employee Payroll Records
If your business has employees, buyers may request payroll reports, including wages, superannuation contributions, and employee entitlements.
Having these financial statements ready ensures transparency and makes the selling process smoother.
How Far Back Should My Financial Records Go for a Business Sale?
Most buyers and their accountants expect to see at least three to five years of financial statements. This timeframe helps them identify trends, assess financial stability, and determine whether the business is growing or struggling.
However, the exact period depends on the size and nature of the business:
- Small Businesses: Typically provide three years of financial records.
- Medium to Large Businesses: Should aim for at least five years of statements.
- High-Value Businesses or Franchises: May require even more extensive records to prove long-term stability.
Why Is a Longer Financial History Important?
Buyers use financial records to conduct due diligence—a detailed assessment of the business’s financial health. The more historical data available, the easier it is for them to:
- Identify profit trends and seasonal fluctuations.
- Compare revenue growth over time.
- Assess risks and liabilities before making an offer.
If your records are well-organised and go back several years, it increases buyer confidence and can lead to a higher valuation.
Also Read: Understanding How to Sell a Business in Australia Legally
What If My Business Has Inconsistent or Incomplete Financial Records?
If your financial records are incomplete, outdated, or inconsistent, selling your business can become more challenging. Buyers want accurate financial information to make informed decisions. Here’s what you can do to address gaps in your records:
1. Work with an Accountant to Reconstruct Financial Data
If records are missing, an accountant can help rebuild financial statements using bank statements, invoices, and tax returns. They can also ensure that financial reports comply with Australian Accounting Standards.
2. Be Honest About Any Gaps or Irregularities
Buyers appreciate transparency. If there are gaps in your records due to economic downturns, industry shifts, or unexpected expenses, be prepared to explain them. Buyers may still be interested if they understand the reasons behind inconsistencies.
3. Get a Business Valuation
If financial records are incomplete, a professional business valuation can help establish a fair market price. Valuers assess business performance using available financial data, industry benchmarks, and tangible assets.
4. Organise Digital and Paper Records
If records are scattered across different systems or paper files, take time to organise them. A well-documented history, even if incomplete, is better than no financial records at all.
5. Highlight Non-Financial Business Strengths
If financial records are inconsistent, emphasise other strengths, such as:
- A strong customer base.
- Valuable business contracts.
- Intellectual property or trademarks.
- Well-established brand reputation.
While strong financial statements are ideal, buyers may still see value in a business with strategic assets or growth potential.
Should I Engage an Accountant or Lawyer to Prepare My Financial Statements?
Yes. Working with professionals when selling a business ensures that financial records are accurate, compliant, and presentable to buyers.
1. The Role of an Accountant
An accountant helps:
- Prepare accurate financial statements that align with industry standards.
- Ensure tax compliance to avoid potential ATO penalties.
- Identify tax-saving opportunities before the sale.
- Provide financial forecasts to demonstrate the business’s future earning potential.
2. The Role of a Business Sale Lawyer
A lawyer ensures that:
- All legal requirements for financial disclosure are met.
- Contracts and agreements accurately reflect financial terms.
- Liabilities and obligations are clearly outlined to avoid future disputes.
- Confidentiality agreements protect your financial data from unauthorised use.
3. The Cost vs. Benefit of Hiring Professionals
Although hiring an accountant and lawyer comes at a cost, the benefits far outweigh the expense. Having professionally prepared financial statements can:
- Speed up the sales process.
- Increase the business’s perceived value.
- Prevent costly legal or tax issues after the sale.
If you want a smooth business sale with minimal risks, engaging financial and legal experts is highly recommended.
Setting Yourself Up for a Successful Business Sale
Preparing financial statements for selling a business is a crucial step in ensuring a smooth and profitable transaction. Accurate records provide buyers with confidence, help determine the right selling price, and reduce complications during negotiations.
If your records are incomplete, working with an accountant can help reconstruct financial data, while a business sale lawyer ensures all financial disclosures meet legal requirements. By taking the time to prepare, you increase your chances of selling your business at the best possible price, with minimal stress.
Need Expert Advice? Speak to Walker Pender Today
Selling a business is a complex process, and having the right financial statements is crucial. Walker Pender provides expert legal guidance to ensure your business sale is structured correctly, legally compliant, and financially sound.
Our team of experienced business sale lawyers can assist with financial disclosures, contract negotiations, and due diligence requirements. Contact Walker Pender today to get the legal support you need for a successful business sale.
