What are the most important financial documents for exit and succession planning?

2 Balance sheet

A balance sheet, also known as a statement of financial position, shows your assets, liabilities, and equity at a given point in time. It reflects your financial health and solvency, as well as the value of your assets and liabilities. Buyers or successors will use your balance sheet to evaluate your liquidity, debt level, working capital, and net worth. To prepare a balance sheet, you need to list and value your current and non-current assets, such as cash, inventory, equipment, and goodwill. You also need to list and value your current and non-current liabilities, such as accounts payable, loans, and deferred taxes. Finally, you need to calculate your equity, which is the difference between your assets and liabilities.

3 Cash flow statement

A cash flow statement, also known as a statement of cash flows, tracks the inflows and outflows of cash from your operating, investing, and financing activities over a period of time. It shows how you generate and use cash, as well as your cash position at the end of the period. Buyers or successors will use your cash flow statement to measure your cash flow performance, liquidity, and solvency. To prepare a cash flow statement, you need to reconcile your net income with your cash flow from operating activities, which includes adjustments for non-cash items, such as depreciation, amortization, and changes in working capital. You also need to report your cash flow from investing activities, which includes purchases and sales of long-term assets, such as property, plant, and equipment. Finally, you need to report your cash flow from financing activities, which includes borrowings and repayments of debt, issuance and repurchase of equity, and dividends paid.

4 Business valuation report

A business valuation report, also known as a valuation analysis, estimates the fair market value of your business based on various methods and assumptions. It provides a range of values that reflect the expected price that a willing buyer would pay to a willing seller in an arm's length transaction. Buyers or successors will use your business valuation report to compare your asking price with their offer price, as well as to conduct due diligence and verify the accuracy of your financial information. To prepare a business valuation report, you need to hire a professional valuator who can apply different valuation methods, such as income, asset, and market approaches, and consider various factors, such as industry trends, economic conditions, and risk factors.

5 Exit or succession plan

An exit or succession plan, also known as a transition plan, outlines your goals, strategies, and timelines for exiting or transferring your business to a buyer or successor. It also identifies the key stakeholders, roles, and responsibilities involved in the process, as well as the potential challenges and risks that may arise. Buyers or successors will use your exit or succession plan to understand your vision and expectations, as well as to coordinate and communicate with you and your team. To prepare an exit or succession plan, you need to define your exit or succession objectives, such as your desired timing, price, and terms. You also need to select your exit or succession option, such as selling to a third party, passing to a family member, or transferring to a partner or employee. Finally, you need to create an action plan that specifies the steps, tasks, and resources required to execute your exit or succession option.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?