Owners have come up against a new obstacle when selling their business, causing deals to be delayed or fall apart.
Today, more than ever, buyers and lenders are looking for detailed accounting records before buying a business. A general summary of assets, liabilities, profits, and losses was sufficient in the past. Typically, sellers would provide a notice to reader statement to help buyers understand the financial status of the business. These statements were also part of the application process when a buyer obtained financing. Notice to reader statements are a compilation of relevant information provided by the business for sale, but they are not audited and provide no assurance regarding accuracy.
Over the past two years, expectations have changed, and buyers want more information. The reason for this is twofold: buyers want to be able to make accurate and realistic earnings projections, and lenders are being more selective when approving loans.
The deals that are closing successfully have one thing that sets them apart; they provide potential buyers with review engagements done by a qualified accountant. A review engagement is a more thorough examination of a company’s financial information and can be used to gauge a limited level of assurance that the data is correct. As a result, they are incredibly beneficial when selling a higher value business where the buyer is likely to obtain a loan for $300,000 or more.
There are three things that you need to know about review engagements.
1. There are upfront costs
Expect to pay at least $5000 and understand the price may increase based on various factors, including the scope of the review, your geographic location, and the reviewer’s qualifications. While this may seem like a considerable expense, it can save you a significant amount of time and money in the long run.
2. It will help you get a fair price for your business
When qualified buyers have access to a review engagement, they can see the actual value of the business and are less likely to submit a low-ball offer. It also provides them with reassurance regarding earnings in the near future and confidence in the potential of the business year over year.
3. Lenders are more likely to provide financing
If there is anything that lenders love to see, it is in-depth information about the financial health of a business. Obtaining financing can be a long, tedious process, and sometimes delays cause a deal to fail. A current review engagement can help financing companies make a lending decision quickly and favourably! In our experience over the past year, more and more lenders require this information before they will proceed with a loan application.
Selling a business is a constantly evolving process. What worked a few years ago isn’t always relevant today. We have seen a significant uptick in requests for review engagements compared to previous years. While this does add another task to a seller’s to-do list, it is an important step that can’t be missed. When business owners supply this information to qualified buyers early on, the business is more likely to sell successfully and with far less stress and frustration. If you are getting ready to sell your business, contact us to learn more about review engagements and how to prepare your business for a new owner.