The importance of accurate financials when selling a business

When a buyer looks at your business listing, there are usually two things they check first. The asking price, and whether the financials actually support it. If those two things do not line up, most buyers stop reading.

This is not about having perfect numbers. Most small businesses have years that are messier than others. It is about having financials that are accurate, explainable, and presented in a way that a buyer can actually work with. Here is what that looks like in practice.

What buyers are actually looking for

A serious buyer wants to understand one thing above everything else: if they buy this business and run it reasonably well, what will they earn? Everything else, the brand, the location, the upside potential, is secondary to that question.

To answer it, they need to see consistent, honest revenue and profit figures over at least the last two financial years, ideally three. Not estimates. Not projections. Actuals, reconciled against your tax returns or BAS statements.

The things buyers pay the most attention to are:

• Revenue trend — is it stable, growing, or declining over the last two to three years?
• Net profit — what does the business actually produce after all costs, including your own wages if you draw a salary?
• Owner's benefit or SDE — seller's discretionary earnings, which adds back your wage, depreciation, and any one-off expenses to show what the business produces for the owner
• Gross margin — especially for retail, food and product businesses, this shows whether the core business model is healthy before overheads

The most common financial problems that derail sales

Cash mixed with personal expenses

Very common in small businesses. If personal phone bills, car costs, family member wages or other personal expenses have been run through the business, that needs to be clearly documented and addback so a buyer can see what the true operating costs actually are. Undocumented addbacks raise red flags because buyers cannot tell if they are legitimate.

Inconsistency between GST returns and accounts

If your BAS statements, tax returns and management accounts tell three different stories, buyers and their accountants notice immediately. Even if there are perfectly good explanations, it creates doubt and usually results in a lower offer or extended due diligence.

A single bad year without explanation

One difficult year does not necessarily devalue a business. What matters is whether you can explain it clearly. A flood, a major customer departure, a supplier issue, a global pandemic, these are all understandable. What is harder to explain is a decline with no clear cause, because buyers will assume the cause is something you are not telling them.

What to actually prepare before you list

You do not need a formal information memorandum to list your business, but having the following ready will make the process significantly smoother and give buyers the confidence to enquire seriously:

• Profit and loss statements for the last two to three financial years
• Most recent tax return
• BAS statements for the current financial year to date
• A list of significant addbacks, with brief explanations for each
• A brief note explaining any unusual years

You do not need to publish all of this publicly in your listing. In fact you should not. But having it ready means you can share it quickly with a serious buyer once they have made an initial enquiry and signed a basic confidentiality agreement if needed.

How financials affect your asking price

Most small businesses in Australia are valued as a multiple of either net profit or seller's discretionary earnings. The multiple varies by industry, typically somewhere between one and three times annual earnings for most categories of small business, though some categories, particularly those with recurring revenue or strong systems, can attract higher multiples.

What drives the multiple up is not just the number itself. It is how defensible that number looks. A business with clean, audited accounts and three years of consistent earnings will attract a higher multiple than an identical business with the same earnings but messy records, because a buyer feels less risk.

In other words, the work you put into your financials before selling is not just about making the listing look good. It can directly increase what someone is willing to pay.

If your accounts are not in great shape

The honest answer is that it is worth spending a few months getting them in order before you list, if you can. A good accountant who has experience with business sales can help you reconstruct or present your financials in a way that is accurate and clear, without misrepresenting anything.

That cost, usually a few thousand dollars, often returns several times over in the final sale price or in the time it takes to find a buyer who is willing to proceed.