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Thinking that you might want to sell your business in the next few years? If so, then stay tuned for some pragmatic steps you can take now which will ease the transitioning of your business later. First on the list is getting and maintaining good financial records.
To start, let's understand who the most likely buyer of your business might be. If you are a "Main Street" or "lower middle market" business (valuations of <$5M) then, according to a recent survey by the International Business Brokers Association and Pepperdine University, the most probable suitor will be a first time buyer. 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 (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 understatement 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 and be comparable to other similar businesses. 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) own the building, then that has to be adjusted; 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 a replacement. Any personal expenses which flow through the business also need to be removed.
Likewise, the valuator needs to compare your business with others in the same industry to establish the appropriate discount rate or market multiple to use in determining the value of the business. This can only be done if the financials are consistent across companies.
I suggest meeting with your tax accountant and Exit Planning Advisor to strike a balance between short-term tax benefits and longer-term business transition strategy.
The less changes that need to be made to the financials during the sales process, the better. Removing personal expenses and properly compensating yourself will help facilitate a sale.
Consistency
Even the most tightly run finance department can mis-categorize expenses. But, a potential buyer will want an accurate picture of the total costs for each expense item. So make sure all the expenses are categorized correctly before you give them your books. Moving and adjusting expenses sends a sign of poor management to a prospective buyer.
You (or your bookkeeper) should know what items are included in each expense category. Check them monthly to ensure consistency and make adjustments if 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!
Best Wishes,
Kelly
©2014, Soundpoint Consulting, LLC
Sound Consulting. Solid Results
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