It is important to have good Books & Records to run a successful business, but it’s also very important to have good Books & Records to sell a business.
I have dealt with Business Owners with both immaculate Books & Records and owners with improper Books & Records. If your looking to acquire a business, which business would you rather buy? I think you know the answer. It is very difficult to properly value a business with poor books & records.
If you want to get optimum value for your business, make sure you have a solid grasp on your company’s business financials. Make sure you have Profit & Loss Statements and Tax Returns and for 3 years, a Balance Sheet, a General Ledger and Bank Statements. You will also need this to qualify for SBA business acquisition financing.
- If you don’t have a Profit & Loss, this is where I would start. This will show a buyer exactly how your company operates. Break it down into Gross Revenue, Cost of Goods Sold, Gross Profit, Company Expenses, and Net Profit.
- The Balance Sheet is a snapshot of your business at this exact period of time. This will show a buyer where he is at that time, and what he will need to do next. This will greatly help if the business deals with a lot of inventory.
- Tax Returns will help corroborate gross revenue, but your Tax Returns do not necessarily state the exact Discretionary Earnings for the owner. Everyone has their legal deductions for their business, and it does affect their taxes, but will not affect your company’s value.
- You’re General Ledger and Bank Statements should corroborate your gross earnings and match up with your Profit and Loss Statements. This is one of the primary elements of Buyer Due Diligence on your company
As a BizEx Business Broker, I analyze the financials to determine the Discretionary Earnings of the business owner. The more confident the buyer is in the financials of the company, the more likely they are to purchase the business. This improved buyer activity will ultimately result in increasing the company’s overall value.
So if you are thinking of selling your business, make sure that the financials are in order to help make the sales transaction a smooth one.
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Robert,
You bring up some excellent points. It is so frustrating to see legitimate buyers walk away from a deal because an owner can not provide the information to substantiate the selling price.
No question about it. Even if an owner has to spend $5,000 or more to get the records pulled together into an organized fashion, it will come back as a higher sales price and may be the difference in getting the business sold at all.