Selling a Business

Entrepreneurs need their own team to navigate the sales process.

Top 10 Accounting Tips To Have “Good” Financial Records For Selling Your Business

posted by: Brian Caldwell
Apr 1, 2019 7:10:15 AM

Definition of "good"

Every business broker will tell sellers that the 1st key to maximizing your business value is having “good” historical financial records.  However, “good” is a subjective and relative term with fuzzy connotations.  One seller’s good records may equal a buyer’s ugly perception.  Regardless how detailed and accurate your records are, expect buyers and their lenders to want more. They have an insatiable appetite for more historical financials because in their mind, more “knowns” equals better decisions and less risk.  If you can’t produce a requested report, at best it increases risk in their mind, and at worst, they question what you are trying to hide.

Don't be afraid to hire additional help

Many small business owners’ roles include chief cook and bottle washer and bookkeeping / accounting.  Keeping the financial records is often at the low end of the priorities for the day with customer service, ordering, and generally keeping the doors open for business at the top.  This system generally doesn’t have the robust reporting capacity that will build trust with a buyer to pay top dollar.

Have details to adjust for non-essential tax expenses

Additionally, the purpose of most businesses records is to minimize profits to reduce taxes.  This is the opposite of what a buyer is looking for in justifying your listing price.  Therefore, we need to adjust the profit and loss statements.  In some businesses, this can be a daunting task to unravel the non-essential business expenses out of the statement.  Fortunately, most buyers are aware of the tax savings that owning a business can provide and are understanding of these adjustments.  Expect to be questioned and defend the adjustments, but in the end, most adjustments are accepted by the buyers. Some businesses have significant “green cash” in their revenue transactions.  These businesses usually require additional proof of revenues with buyers.  Unreported cash sales is illegal and should not be used in determining the value of the business. 

Drum Roll Please...

So…if you are considering a sale in the next few years (and every business owner should be structured for a potential sale in the future!), here are 10 tips to improve your financial records.

  1. Pay your accountant to help set up better records. If you drop your receipts off in a box to your accountant on March 1 of each year, make this the year you commit to starting good bookkeeping practices with the help of your accountant. The dollars you spend with your accountant will be recouped at sale multiple times.
  2. Business specific books. If the business is rolled into multiple businesses for financial purposes, start splitting them up now.  It will help you make better decisions, and increase buyer confidence.
  3. Set the records up for either cash or accrual, but not a hybrid of each.
  4. Have appropriate level of chart of accounts itemization to show appropriate adjustments.
  5. Take periodic hand counts and reconcile inventories. Get rid of obsolete or no value inventory.  You’ll need to do it at some point anyway.
  6. Generate monthly or at least quarterly statements that can be tracked to show business seasonal trends.
  7. Have provable employment and sales tax record trail.
  8. Sales analysis or POS system reports that can show different income categories easily
  9. Complete balance sheet accounts with accurate equipment, inventory, accounts receivable, accounts payable, lease obligations, short and long term debt, and a historical trend of working capital is extremely helpful for a buyer determining how much working capital is needed.
  10. Know how to generate reports for rapid access when requested.
  11. Bonus tip: Here’s a bold thought that will go against every penny saving bone in your body… consider trying to actually maximize your income taxes for three to five years prior to selling. Showing your profits proudly to God, buyers, and your country could potentially increase the selling price or increase your chances of selling. It works for Wall Street, why can't it work for you?  Of course you will want to consult your accountant, attorney, and our business advisors prior to taking such a bold step, but if nothing else it would be fun to record your accountant’s face when you ask him about the concept. “You want to do what?!”

What if you’re ready to sell now, but your books aren’t stellar? 

Don’t worry, many businesses in the same situation are listed today and do sell.  The trick is a close review of the financial reports you do have with our advisors so that we can develop a plan to generate the clearest accurate picture of your historic financial performance, and have time to develop reports for anticipated buyer requests. A little planning and effort at the front end prior to listing can reduce your stress and increase chances of a sale. 

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