Every owner knows that the financial situation of his/her business is the heart-and-soul of the operation. Keeping sloppy books can not only foul up the operation, it can mean disaster when it comes time to selling your business.
When meeting with prospective clients, we often tell business owners to “clean it up.” Clean up the inside and outside of your business. Most importantly, make sure your financials are clean. A trustworthy financial statement can be more important for a sale than anything the owner can do or promise. If you don’t have a system in place for bookkeeping, get one.
There’s no question that running the day-to-day operations of a business and spending time putting out daily fires can mean owners very easily let the financial management practices slide. Almost everybody does it at some point, but it’s not something an owner should allow to become a habit.
There are four major potential deal killers, with regard to financials, when selling your business:
1. Not keeping up-to-date records.
Nobody likes the burden of tracking receipts, balancing the books, and keeping up on accounts payable and receivable, but these things are the foundation of your business. You need to have a system that will track invoices, accounts payable, accounts receivable, expenses and a system that will keep them up-to-date. Most businesses utilize QuickBooks, or a proprietary system developed specifically for their business. Do whatever you need to do to make sure you’re staying on top of this.
2. Not budgeting or forecasting.
It’s tempting to just figure things out as you go along. If your practice is simply to buy supplies as you need them without thinking ahead, you are not engaged in a long-term strategy for building your business and making it more salable. Short-term financial strategy is a terrible way to look at building your business. Creating a long-term strategy that will keep your business successful for years to come will increase the value when it is time to sell your business.
3. Not Using the services of an accountant or bookkeeper.
If you don’t know what you’re doing, you simply have to invest in someone who does. If you decide to keep your own books and you don’t have much expertise in accounting, you’re setting yourself up for trouble. A good bookkeeper or accountant who provides you with up-to-date financials will make your life easier and certainly increase the salability of your business.
4. If you use your business to pay personal expenses, be sure to document legitimate add-backs.
When a buyer values your business, they will take into consideration expenses you have run through the company that are not true business expenses. The buyer will count these as additions to the profitability of the enterprise, which will increase the business’s value. You are most likely going to be paid a multiple of cash flow or profits in the final valuation. Therefore, you should invest the time to sift through your historical expenses carefully. “Excess compensation” such as the salary of your spouse who only shows up at the annual picnic, part of the pay for the yard man who keeps your lawn at home as well as the company’s grounds but only receives one check, your daughter’s wedding, the lease on the beach house are all considered expenses that will either disappear the moment the company is in the hands of a new owner or won’t be incurred again.
Businesses are valued based on the strength of their historical income statements. It is particularly vital that your company’s financial records be accurate and verifiable. Buyers and lenders will want to carefully review them.
Some of these financial oversights may seem minor, but over time they can build up into what becomes a major problem when it’s time to sell your business. The only way to keep your company healthy is to practice responsible financial management, so it doesn’t cost you the sale of your business in the future.
Need a pro to help plan a successful exit strategy?
While the above four steps can be taken now to plan for a successful exit strategy, a professional business broker can help. They can identify and help you tackle other steps based on the specific circumstances of your business.
You can also download our Selling A Business Checklist, which offers insight into how to get your business ready to sell:
If you need help putting together a strategic plan, please contact the Benjamin Ross Group at 215-357-9694 to speak with a business broker who can help you start the process.