One of the most overlooked aspects of preparing a dealership for sale is the financial clarity of the business. Over time, many dealership owners mix personal and business expenses, making it difficult for potential buyers to get a true picture of the company’s financial health.
If your books contain unnecessary complexities, it can slow down or even jeopardize a sale.
This articles explores the importance of financial transparency, how to identify mixed expenses and strategies to streamline your financials to maximize your dealership’s value.
Why financial transparency matters
Buyers want a clear understanding of a dealership’s financial performance. When personal expenses are interwoven with business transactions, it creates uncertainty and raises red flags.
Here’s why financial transparency is critical:
- Increases buyer confidence
- Buyers need to see accurate financial statements to evaluate profitability and potential return on investment.
- Hidden or mixed expenses can lead to skepticism and lower perceived value.
- Speeds up the Due Diligence process
- The cleaner your books, the quicker a sale can be completed.
- Eliminating unnecessary financial entanglements reduces back-and-forth negotiations.
- Maximizes business valuation
- A well-documented and transparent financial history increases your dealership’s credibility.
- It enables buyers to accurately project future earnings, leading to stronger offers.
[RELATED: Preparing your dealership for a sale: Step 3]
Identifying mixed expenses
It’s common for business owners to integrate personal expenses into their company’s finances, but these should be separated before moving forward with a potential sale.
Here’s where to look:
- Owner’s personal expenses
- Personal vehicles or fuel expenses charged to the business.
- Family members on the payroll who don't contribute to dealership operations.
- Entertainment, dining, or travel costs that aren't directly related to business activities.
- Non-essential business expenses
- Excessive owner perks, such as luxury office furnishings or high-end company vehicles.
- Over-the-top sponsorships or charitable donations that a new owner may not continue.
- Assets that won't transfer in the sale
- Real estate that is personally owned but intertwined with dealership operations.
- Equipment or tools that belong to the owner rather than the business.
- Non-standard compensation agreements
- Over-market salaries or benefits for family members or long-term employees.
- Deferred compensation agreements that won't be honored post-sale.
[RELATED: Preparing your dealership for a sale: Step 2]
Steps to unmix your finances
Once you’ve identified potential financial entanglements, it’s time to clean them up. Here’s how:
- Separate personal and business expenses
- Review all financial records and remove non-business-related transactions.
- Adjust payroll and compensation structures to reflect industry norms.
- Document any adjustments
- Keep a record of all removed expenses so buyers understand financial changes.
- Provide clear explanations for any adjustments made to historical financials.
- Create a clean Profit and Loss (P&L) statement
- Buyers will scrutinize your P&L statements — ensure they reflect actual business performance.
- Remove any non-operational expenses to provide an accurate representation of profitability.
- Review and normalize financial statements
- Work with an accountant to ensure financial statements align with industry standards.
- Provide clear financial reports for at least the last three years.
- Prepare for buyer inquiries
- Expect buyers to ask detailed questions about past financial practices.
- Be prepared to explain any remaining irregularities in your records.
Addressing tangible and intangible assets
In addition to financial statements, dealerships often hold assets that must be clearly defined before a sale.
- Identify retained assets
- Are there vehicles, real estate, or equipment you plan to keep post-sale?
- If so, remove them from the dealership’s balance sheet and adjust financials accordingly.
- Clarify ownership structures
- Ensure any shared assets between personal and business use are properly documented.
- Avoid last-minute disputes over what is included in the sale.
- Evaluate leases and contracts
- Review any outstanding leases on equipment or property.
- Ensure that any obligations transferring to the new owner are clearly outlined.
How buyers will view your financials
Potential buyers will analyze your dealership’s financials through a critical lens. They will be looking for:
- Consistency: Year-over-year financial stability without unexplained fluctuations.
- Profitability: A true reflection of the dealership's earning potential.
- Clean Books: No excessive add-backs or adjustments that make evaluation difficult.
The impact on dealership valuation
Unmixed financials not only make the sale process smoother but also positively impact valuation. A buyer will typically calculate a dealership’s worth based on an adjusted net profit basis. If your adjusted net profit is inflated with unnecessary expenses, it could result in a lower purchase price.
By streamlining your financials and ensuring all records accurately reflect the business's performance, you create a stronger negotiating position and can demand a higher valuation.
Final considerations when unmixing
The art of unmixing is a crucial step in preparing your dealership for sale. The goal is to present a clear, accurate and easily digestible financial picture to prospective buyers.
The sooner you begin this process, the better prepared you will be when the time comes to transition ownership.
Our key takeaways:
- Financial transparency is essential for buyer confidence and maximizing dealership value.
- Identify and separate personal expenses from business financials.
- Normalize payroll, compensation, and discretionary spending before listing your dealership for sale.
- Work with financial professionals to prepare clean financial statements.
- Ensure all tangible and intangible assets are properly accounted for in the sale.
By proactively addressing these areas, you can streamline the sale process, reduce potential roadblocks and ensure you receive the best possible price for your dealership.
The more prepared you are, the more attractive your business becomes to buyers, leading to a smoother, more profitable transition.
