M&A Deal Killer Miniseries #5: Inaccurate or Poor Bookkeeping
So, you’re thinking of selling your business? First, you need to consider the status and accessibility of your books and financial records.
Successful financial organization and planning can dramatically increase the purchase price, closing a cash transaction, and the odds of selling your business. As you consider selling your business, know that you’re not alone. Most owners are just like you, they don’t exactly know what does or does not need to be done from a financial prospective to prepare for sell nor the true current market value of their business. First, it is imperative that you are provided with solid information to base your decision, “when is the right time to sell my business?”
Viking Mergers & Acquisitions has assisted well over 500 business owners for two decades, at no cost, by working with them through a clear and confidential process and a set of procedures used to estimate the current economic value of their business. It is important to know that most buyers utilize the same process to determine the price they are willing to pay you for your business. Below you will find examples of where buyers find additional value in a business when accounting procedures reduce their go forward risk, thus resulting in a higher purchase price and cash in your hand at closing.
What Qualifies As “Poor Bookkeeping?”
Lacking on entries and reconciliation.
- For the small business owner, time is defiantly working against you when it comes to recording daily entries. Starting a habit that lacks the continuous effort in reconciliation of bank statements, credit card statements and other financial accounts can cause inaccurate financial statements as well as inaccuracy in other reports. The main issue with inaccurate financial reports is that you do not have current information to assist when trying to make imperative business decisions. Without current information, you cannot show a buyer the actual profitability of the business to maximize your purchase price.
- Inaccurate financial reports can also cause confusion with Work in Progress (WIP.) In most businesses, it is useful to have the ability to pinpoint cost overruns at the time that they occur. This allows management to adjust the operation of the business, address vendor issues and train staff properly to allow for profit growth going forward. Buyers will pay a higher price for a business with a real-time cost system in place. This type of safeguard reduces the risk for the buyer by allowing a clear understanding of necessary adjustments that need to be made while moving forward.
- Accounts payable can also become an issue through lack of timely reconciliation. For example, if your company is continuously outsourcing labor or buying products from vendors, it is likely that multiple invoices will cross your desk daily. This can cost you more money than expected if such invoices are not paid on time, causing loss of vendor discounts, late fees and the ability to negotiate lower costs for supplies and material on future purchases. These additional costs will reduce profitability of your business and ultimately result on a lower purchase price when selling the business.
- Tracking your receipts will prove to be a backup source of data for reference if needed during due diligence. Sometimes you will run into mistakes by expensing items that have no actual business expense during bookkeeping, reducing profit and ultimately the selling price of the business. One way to solve some of these issues and increase the value of your business is to look back at past expenses with actual receipts to solve inaccuracies of recording issues.
Waiting on your accountant to give feedback on business summary.
- Solely relying on your accountant to give you feedback on your business is not an accurate way of bookkeeping. Although they are building financial reports for your company, they are not looking at the current data. When trying to make decisions in a timely manner, relying on your accountant for bookkeeping purposes does not give you the financial tools to have an accurate understanding of your business productivity, profitability and cash flow. Buyers tend to show more interest in the businesses that can access financial data at any point in time. This practice reduces the buyers risk and allows them the clarity and understanding of financial and operational needs as they occur during the normal course of business.
What are the risks associated with poor bookkeeping and financial inaccuracies?
Buyers may assume that you are trying to hide something.
- Poor bookkeeping can also slow the process of selling your business. Often when an agreement of terms between buyer and seller occurs, inconsistent books can cause buyers to be reluctant to close a transaction. They might have thoughts that they seller is trying to hide something.
- Inaccurate bookkeeping opens the door for the buyer to reprice the agreement of terms, causing the purchase price to be reduced or a seller note to be introduced as additional security that the financial condition of the business is accurate.
Reduced odds of successfully selling your business.
- When a company is presented with books that are sloppy, it is a poor representation of the of business owner and staff. The majority of buyers do not want to buy a business that has been poorly managed financially. This shows not only that the company isn’t up to date, but that the current owner is lacking information to properly run the company efficiently and effectively.
Not knowing your limits.
- Poor bookkeeping? For a small business owner, your business is your life. When making decisions, it is imperative to use as much data and experience as possible in order to keep your business running at its prime. If you do not know the current financial status of your company, how do you make educated decisions for growth? Likewise, making decisions that are out of your league could throw not only your company into financial stress, but also can also cause you to spend more time on correcting poor business decisions. This can take away from your daily duties as a business owner.
- Inaccurate bookkeeping can lead to legal issues further down the road. Disclose all financial information when selling your business. During the sale, it is often required by the buyer and their lender for you to represent and warranty past current financial reports and tax returns. They want the security of accurate financial records, profitability of what was presented during due diligence, confirmation that all expenses and debts have been accounted for, and correct tax filings that are complete or in the process of being completed. Such areas that may need to be addressed prior to or during the closing are taxes that may be unpaid or past due, which may have caused a lien on the business. Also, other issues may arise such as failure to pay creditors, which can cause post-closing vendor situations for buyers. When this happens, it is likely that you may be held accountable. This could harm you financially and cause you to accumulate legal fees.
What can I do to improve bookkeeping organization?
Hire a professional bookkeeper.
- Hiring a professional bookkeeper is very wise when it comes to being successful. Many owners of small businesses think that they can save money by keeping up with the books themselves or even someone who is a cheap hire. Bookkeeping can actually be seen as an expense. Trying to use a cost cutting method for bookkeeping opens the door for inaccuracy, which can destroy a company when trying to make decisions. Cash flow can also be distorted when not kept up to date, and this could turn into a severe problem. Every business owner knows that cash flow is the heartbeat of a business. When the owner is the bookkeeper, buyers tend to feel that they will not be trained properly during transition of the business post-closing. Buyers do not want to spend most their transition time on accounting data entry; they want to spend it with customers and staff. Buyers fear the inability of having data to assist them when change needs to be made to the business plan to pull out of poor situations.
Keeping essential information at your fingertips.
- Decision making is the main factor that can hold buyers back from purchasing a business. Buyers that want to grow a business will want to spend time analyzing their new business to find areas of profitability and growth. Most buyers look at accounting as a growth tool. Buyers will pay more for a business when they know they will spend less of their time entering data to produce correct updated financial tools and more time reviewing solid data to create growth and profit.
Good bookkeeping is essential when selling your business. Viking Mergers and Acquisitions exercise of gathering, inputting and comparing your data to other similar businesses and successfully closed transactions is our first step and best practice. We feel it is the beginning of determining when it is the right time financially for you to sell your business. Interested in selling your business? Contact Viking Mergers and Acquisitions today.