When selling your company one day, gross profit needs to be reported properly
It’s a frustrating day if you look to sell your company and have the acquirer tell you they will need to “recast” your financials (or ask you to do it) before they can make you an offer. The reason for this could be because the way you’ve been calculating gross profit is causing confusion for them. This could be because there is a norm for how gross profit is reported in your industry and you aren’t employing it or because you capture some costs in your SG&A (sales, general, administrative) portion of your P&L that would normally be included in a gross profit calculation.
It's easy to avoid this issue by talking with your bookkeeper, controller, CFO or CPA and discussing how your company calculates your gross profit. And your CPA can wear the glasses of an acquirer and tell you how your calculation of gross profit will be interpreted. You might even have to go to an industry source (or an investment banker that works in your industry) that can help you truly understand what the norm is for your industry.
And make sure when the day arrives that you want to sell, you’re ready for the basic questions the acquirer will ask about your gross profit. They will obviously want to know your company’s consolidated gross profit but they will want to peel the onion back further and understand your gross profit at the product/service level, market segment level and even customer/client level. It makes sense they will want to peel back this far because they want to understand specifically where your company makes its profit. The consolidated number doesn’t tell them where specifically your profits are coming from, something the acquirer will absolutely want to know.
Use time as a friend and ensure that a very critical financial KPI needed to excite an acquirer will be “clean”. Avoid having to one day recast your financials…get them set up properly today.
