Maybe you’ve got a box of receipts hidden deep in the corner of your office. Or maybe you have a few financial to-dos that have had a long term stay at the bottom of your to-do list. You know it’s a problem … but do you know it’s also a barrier to the successful sale of your business?
Reasons to Clean Up Financials
- Give the Buyer a Reason to Buy – not a Reason to Hesitate
Without clear financials it is difficult – if not impossible – for a buyer to analyze whether buying your business is a good idea. Without proper financials, the parties that are still interested in the business despite the ambiguousness financials will give you a lower offer. These buyers will want to protect themselves from risk, and not knowing financial specifics will be perceived as a large risk.
- Build Trust with More Than a Handshake
A promise that your company is “doing okay” financially is not enough to make a potential buyer interested. Buyers trust financial statements, not promises from the seller. Messy financial statements, excessive entries labelled “personal expenses”, and missing information can erode buyer trust and confidence. On the other hand, clear, well-organized financial reporting will set their minds at rest.
- Help the Buyer Plan for Their Future
If a buyer needs financing to purchase your business or if they want to figure out the tax implications of their decision, the more financial information they have, the better. For instance, a proper list of assets is important for a buyer who needs financing.
Help the buyer and help yourself by making the state of the business’ finances as clear as possible.
First Steps – The Financial Organization Checklist
Make Sure EVERYTHING Matches
- Do your retained earnings match your tax returns?
- Are your cash accounts reconciled?
- The business’ cash in and cash out needs to match bank records. This includes bank accounts and credit cards. Sounds like a lot of work? Fortunately software like Quickbooks or Wave can help with this.
- Do your inventory levels match what your records say they are?
Organize all your assets and know their proper values
- Have you depreciated your assets (PPE) – for proper valuation?
- Have you listed your property and equipment as assets?
- Be sure to identify all assets in business (not everything may be found on depreciation sheet). Also, check titles to ensure that everything is actually owned by the business. Identify all nonessential assets and extract them strategically.
Make Strategic Decisions
- Do you see high margin areas where you can increase sales, or areas where there are extra expenses that can be eliminated? Tweak these areas to improve overall business value.
- Do you foresee difficulty keeping financial information organized in the future? Ask for help and hire a professional to help you.
- Are you reconciling often? If not, it is a good practice to take up.
Do it now or do it later, but one way or another you will need to present a clear financial picture to any potential buyer. A party’s accountant will be examining your information and will be expecting it to be organized.
This is the information that will be used as a negotiation point. Messy financials will only drive down the price of the business as the buyer seeks to mitigate their risk. Clear information however, will improve the value of your business, decrease your stress, and increase your immediate profits by allowing everyone involved to make an informed decision.