Selling Businesses With Bad Financials

It is unfortunate but true that approximately 65% of small businesses do not have good financials that properly reflect gross income, operating expenses, and net profit.  This creates many negative issues when it comes time to sell the business.  The question is whether or not the business is salable.

So when a business owner makes the decision to sell their business, they have major problems that include:

1. Providing tax returns that do not properly reflect gross income which could run the risk of a buyer reporting false tax returns to the IRS.
2. Buyers will not be able to obtain bank financing as they all require at least two years of tax returns reflecting sufficient cash flow to pay the buyer a reasonable salary and pay the bank note.
3. The inability to prove business profitability to a prospective buyer.
4. The inability to provide good financials creates buyer mistrust.
5. Unable to properly determine and support an asking price for the business.

From a Business Broker prospective, when a business owner wants to list their business, the broker has to make a decision wheather or not to take the listing.  The incentives to take the listing include:

• There is a motivated seller.
• There is the opportunity to take on a new listing.
• If properly handled, the business might sell.

On the other hand the broker runs the following risk:

• Without good financials, the broker could be spending a lot of time and money marketing a business that has a low probability of selling.
• Determining and supporting a reasonable purchase price for the business is time consuming and difficult to justify.
• In the event the business does sell, and the Buyer discovers the information provided was not correct will often lead to the filing of a lawsuit which will likely include the broker.
• Buyers will not be able to obtain bank financing, so the business owner will need to provide seller financing.

There are several reasons that many small business owners do not have good financials.  They include the following:

• They have not completed one or more of the tax returns due to oversight or objections to paying income taxes.
• They have tax returns, but they do not include all the gross revenue because the business owner did not report some portion of the cash sales.  This is a major problem with cash- oriented businesses such as car washes, laundrymats, and restaurants.
• Many owners do not have monthly  P & L statements due to the cost of preparing them and/or  not fully understanding the need for them.

Some business brokers may decide to not take on the listing and will advise the business owner of the documents that they require prior to taking on a listing.

The value of any business is either the value of the tangible assets being included in the sale or a multiple of the discretionary earnings whichever is greater.  In the event the business has a good location, good equipment, and salable inventory, an asset sale may be applicable which does not reflect any value for intangible assets such as goodwill.  Approximately 25% of the businesses we sell are considered to be asset sales wherein the price being paid is equal to the value of the tangible assets.  For example, many restaurants are sold as an asset sale because the new owner can buy the business assets and take over a favorable property lease and then change the name and menu concept for their new business.  In most cases it is much cheaper to buy an existing business that has a good  location and equipment than it is to start from scratch and be required to pay for leasehold improvements and premium rent.

In the event the business owner wants a price greater than the tangible assets and the business broker is willing to take on the listing, the first step will be to determine if there are any documents that can provide evidence of gross income and expenses such as bank statements, computer records, and/or customer invoices.  There are internet programs such as BIZMINER.COM and VerticalIQ.com that can provide industry information and standards for operating expenses.  The business broker in conjunction with the business owner can develop a pro forma income statement which the owner must sign reflecting the owner’s best estimates as to the annual gross revenue and operating expenses.  Then an estimate of discretionary earnings can be determined and thereby provide support for a reasonable asking price which will include all the tangible and intangible assets.

Due to the lack of good financials, prospective buyers will be unable to get a bank loan, so the owner must be willing to offer Seller Financing which is another form of security for the buyer.  The key to successful seller financing is to get a significant down payment, usually 30% to 40% of the purchase price with the term being 3 to 5 years and include interest at no more than 6%. Seller Financing can be beneficial to the business owners due to:

• Getting a somewhat higher price for the business.
• The tax benefit of only having to report the sale proceeds as they are received over the 3-to-5 year loan period.
• They earn 6% on the loan which is additional income for the business owner.
• It provides confidence for the Buyer in that the seller is willing to carry the note knowing the cash flow of the business must be sufficient to pay the note payments.

The following factors are required to take on a listing without good financials:

1. The business owner must be able to provide supporting documents such as bank statements, computer records, and/or customer invoices.
2. The Seller must be willing to help prepare an annual pro forma income statement and sign it which will be given to buyer prospects.
3. The asking price must fall within a reasonable range based on the projected discretionary earnings.
4. The sale can be structured as an asset sale rather than the sale of a corporation so that the buyer is not acquiring any potential litigation imposed on the Seller.
5. The Seller must be willing to provide seller financing which will greatly expand the number of buyer prospects who could not otherwise obtain bank financing.
6. The Seller must be willing to sign a one-year listing agreement and understand that it will likely takeover 8 months to find a buyer willing to accept the Seller’s representations of the business and agree to the terms and conditions of a sale and knowing that there is the possibility that business will never sell.
7. Both Buyer and Seller must be willing to sign the following Broker Disclaimer at closing.

 

BROKER DISCLAIMER

We, the Buyer and Seller, being the parties to the sale of and closing of that business known as “Name of the Business” located at “Address”, have not requested or received any legal and/or financial advice or services from Advanced Business Brokers, Inc., its principals, associates and agents with regard to the subject matter of the sale, including, but not limited to the financial condition of the Business or the legal effect of any of the documents involved in such sale. We have not relied on the representations of said broker, its principals, associates and agents regarding any material fact in connection with the subject matter of the sale, the business involved, its value, compliance with any applicable law, or the financial condition thereof or of either party hereto and acknowledge that each party has conducted an independent investigation of the material facts relied upon in this transaction.

Buyer and Seller further acknowledge that Advanced Business Brokers, Inc., its principals, associates and agents make no representations or warranties as to the accuracy, authenticity or legal effect of any statements, reports or other documents furnished the parties to this transaction and is not responsible for any loss which may arise from this transaction. Buyer further acknowledges that he is relying upon his own judgment and decision in making this offer and in entering and consummating the purchase of this business.

Any or all items decided by the parties to be handled or conducted outside of escrow or after closing shall be settled by and between, and become the sole and express responsibility of, the Buyer and the Seller. Buyer and Seller agree to hold harmless and/or indemnify Advanced Business Brokers, Inc., its principals, associates and agents from any and all liability whatsoever with respect to any such “outside of escrow” items.

IN WITNESS WHEREOF, the parties have executed this Agreement the ___ day of ______, 2026, to be effective as of ___day of ______, 2026 (the “Effective Date”).

 

In the event the Seller is not willing to agree to all 7 of the above requirements, the decision is easy.  Don’t take listings that do not have good financials or meet your minimum listing requirements.

Jeffrey D. Jones,  ASA, CBA, CBI
[email protected]