Business owners who do not, will not, or cannot use their financials for guidance will become one of the 75% that do not successfully sell.
By Dave Driscoll
This fact came to mind (again) after reading the article “How well do you know your numbers? How to use your financials as a competitive edge to build a better business in 2021” written by Ron Ameln in Small Business Monthly, December 2020 issue.
Metro has been beating this drum since 2009 when the business brokerage was founded. Ultimately, your company financials will be the largest single reason you will sell your business. If your company’s numbers are not organized to tell the story of the business, prospective buyers will become confused, frustrated, and skeptical of what is real vs. smoke and mirrors, and simply walk away. Or, a buyer may see the opportunity to capitalize on the seller’s weakness (their financials) and expect a bargain.
The following are relevant excerpts from a small selection of Small Business Monthly articles I wrote about the importance of accurate company financials when selling your business:
I need to vent my frustration with business owners wanting to sell their businesses with incomplete or non-existent financial information.
All the sexy graphs, pictures, history, exciting stories, and hard work to create interest in your business will not support a sale if the financials of the business are not readily available, clear, well-organized, and supportive of the value you are asking for the business.
Making the decision to sell a business is hard and lack of good financial information further complicates the process. Once buyers are past the beauty contest stage, the next request is for hard evidence of the historical financial operations of the business. Buyers very rarely buy on looks alone.
As a buyer, the first thing you want to analyze is the financial performance, including profit & loss statements, to determine whether the business operates at a profit. And…?
This is where the rubber meets the road for the seller. This is where a business sale moves on to the next stage or dies! Will the prospective buyer be given the information they need to unequivocally analyze the financial performance of the business? Or will the prospective buyer be given bits and pieces that don’t really tell the story of the business – just a collection of numbers organized solely to create a tax return with the owner’s main objective to minimize tax liability?
The common elements a buyer looks for when buying a business are:
1. Solid, positive cash flow
2. Financials tied out to operations that paint a picture of how the business runs
3. Strong management not dependent on intense owner direction
Financials, financials, financials: The most important factor prospective buyers consider is historical financials. Make it easier on yourself to tell the story of your business growth and cycles by maintaining accurate financials. Also track your discretionary spending. You don’t want to be forced to re-create years of financial reporting when you’re eventually in the middle of trying to woo a buyer.
The bonus: Accurate, timely financial reporting will help you run your business more efficiently and profitably in the meantime
Failing to keep accurate, descriptive financials: Buyers typically expect to review tax returns and financial statements for the past five years. If your financials aren’t in order and do not clearly define the operations and costs of doing business, the buyer has no basis to support the valuation of the business. Without accurate and complete financials, expect a significantly lower offer.
Starting a new business? Keep accurate, meticulous financials and review them quarterly
Creating a profit and loss statement and balance sheet should be a non-negotiable habit from the beginning. If you are not comfortable with bookkeeping software such as Quicken or QuickBooks, or just don’t have time, work with an accountant and make sure he/she knows the real story. If you aren’t sure where to record certain expenses or income, ask. Guessing will only create a bigger problem down the road. Your accountant should be your ally, helping identify opportunities and discrepancies as you build your success. Review your financial results quarterly to recognize trends, strengths, and any problems to be addressed promptly.
Of course, you want to minimize taxes and enjoy the perks of business ownership, and you should. BUT document your discretionary spending, meaning the expenses that are not really essential for running the business. When the time comes, you can’t sell business value that you can’t prove.
Business owners, do you see a theme here? The most reoccurring and destructive issue we encounter is the lack of organized, descriptive accounting of the business. Distinguish your company with accurate, consistent financial reporting and you’ll have the best chance of being in the 25% of businesses that successfully sell. This factor is within your control and will have a significant impact on your Life Beyond Business.™
The choice is yours.
Dave Driscoll is president of Metro Business Advisors, a mergers & acquisitions, valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or (314) 303-5600. www.MetroBusinessAdvisors.com