I am often asked to complete a valuation because the owner is thinking about selling his or her business. Many times I find financial statements that are not up to par. Here are some thoughts from a prospective buyers' perspective.
Enjoy!
Messy Financial Statements
Don't Sell
Thinking that you might want to sell your business in the next few years? If so, make sure your financial records are up to snuff. It will save you time, effort (and maybe even embarrassment) later on.
To start, let's understand who the most likely buyer of your business might be. If your business is considered "lower middle market" (a large majority of businesses fit this category), the most probable suitor will be a first time buyer. And, most first time buyers are:
Not sophisticated business buyers
Investing much of their life savings into the deal
Not as knowledgeable as you in your business or industry
Nervous
It is incumbent upon you to make this process as painless as possible for them. Similar to selling a house, make sure all the loose ends (operational, legal, financial and otherwise) are tidied up before putting it on the market.
Let's face it, the quality of financial records for smaller businesses can range across a wide spectrum. I have seen everything from receipts in a shoebox to CPA-generated monthly statements, and everything in-between.
Luckily, you don't have to be a skilled bookkeeper to own and run a successful small business. But you do have to have clean books and records if you want to sell your business.
So you might as well get started now. Restating and adjusting books while a potential buyer is looking over your shoulder is nerve-wracking and will not instill great confidence in your prospect.
Proper Accounting Procedures
Much of small business accounting falls down with the balance sheet. (Yes, there is more to business financials than just the income statement!)
A recent client had significant fixed assets, yet there was no depreciation on the income statement and a gross overstatement of the asset value on the balance sheet. Others don't accurately reflect Accounts Receivable, Accounts Payable and Inventory because they use accounting software much like a checkbook register.
If this sounds like you, then I highly recommend you hire a qualified bookkeeper now. They still have time to clean up the current year and set up the proper accounting procedures for the coming years.
Apples-to-Apples
We all know that the owners of small privately held businesses can and do exert some flexibility in their accounting. However, to sell a business those financials need to reflect the true operations of the business. Why?
Well, the buyer, needs to know exactly what they are buying. If the business is not paying market rent because you (or a related party) owns the building, then that has to be adjusted as it is unlikely that the new buyer will get the same deal. Likewise, if you are paying yourself a higher-than-market salary, then that needs to be adjusted to reflect the true costs of hiring your replacement. Any personal expenses which flow through the business also need to be removed.
The potential buyer will want to compare your business with others in the same industry. Their job is much easier if the financials are consistent with industry practices.
The less changes that need to be made to the financials during the sales process, the better. Remember, you want less - rather than more questions.
Consistency
Even the most tightly run finance department can mis-categorize expenses. But, a potential buyer will track trends and will need an accurate picture of each revenue and expense item. So make sure all items are categorized correctly before you give them your books. Moving and adjusting line items sends a sign of poor management to a prospective buyer.
You (or your bookkeeper) should know what items are included in each revenue and expense category. Check your books monthly to ensure consistency and make adjustments as necessary.
If you are thinking that you might want to transition your business and would like an objective review of your financials, please give me a call. I would be happy to help.
Until next month, Point Your Business Where it Needs to Go!
We deliver full business valuations reports and related services for a variety of reasons, including exit planning, divorce and potential transactions.
We provide financial services for those in the process of divorce and needing to untangle the complexities of a financial separation. Member of King County Collaborative Law.
