Accurate Financial Records When Selling Your Business

A big issue we experience with many small businesses is the lack of financial integrity.  This causes issues with the business valuation and sometimes trustworthiness from a buyer’s standpoint.  What is being bought or sold are instant cash flow and a future stream of income.  Without knowing the correct numbers it is hard for a buyer to predict what this future stream of income might be. 

Since future income is impossible to definitively compute and hard to estimate, the company's financial history, at least, provides concrete facts and insight to future performance. So, reliable financial records are not only a critical element of business management but also support the business' historic profitability, operational efficiency, and its solvency.

Most importantly, however, reliable financial data is the impetus for two critical events to occur in successful small business acquisitions:

1. the ability for a prospective buyer to forecast the future probability of growth and prosperity of the company
2. the likelihood that a bank will provide financing for the acquisition

Many sellers say they are making X number of dollars a year, but without proving it this income carries no weight in the value of a business.  The phrase we like to use in these cases is “You can only steal money once”.   You can not steal from Uncle Sam and then expect the buyer to pay for it. 

Therefore, a review of your business financials is critical prior to putting it on the market.  This will help your Business Advisor prepare a more accurate valuation and avoid surprises later when a buyer is performing due diligence.

To make sure your company remains attractive and to avoid the deal falling apart during due diligence business owners should consider these tips for keeping accurate financial records:

1. Understand your financials and be able to explain them if the buyer has questions about them.  This includes revenue, expenses, and net income. 
2. Produce cash flow statements with future projections.
3. Have detailed documentation showing any “cash” payments.
4. Be able to defend non-business essential expenses.  For example, travel expenses for a restaurant that does not deliver or cater.
5. One-time expenses and expenses a new owner would not incur.
6. Compare each year's performance to the prior years and be able to explain the reason for any variances.

Following these steps will help sellers drastically decrease the probability of deals falling apart and will help the business sell for its true value.