Having a deal fall apart at the last minute is every business owner’s nightmare. But if you take the time to anticipate what could go wrong, you can have time to address and resolve potential issues. If you are not sure what to look for, know that you’re not alone. Most owners are just like you; they don’t know exactly what does or does not need to be done from a financial perspective to prepare to sell their business. We can assure you that if you are thinking of selling your business, you must consider the status and accessibility of your books and financial records. To help, in this final installment of our 5-part series, we dive into another of the biggest business deal-breakers for any M&A transaction, Deal Killer #5: Inaccurate or Poor Bookkeeping, and how you can identify, prevent, and resolve these issues.
Deal Killer #5: Inaccurate or Poor Bookkeeping
Successful financial organization and planning can dramatically increase your purchase price, the likelihood of closing a cash transaction, and the odds of selling your business at all. Buyers find added value in a business whose accounting procedures reduce their go-forward risk. This results in a higher purchase price and cash in your hand at closing.
1. How to Identify Poor Bookkeeping
We’ll begin this strategy by describing what qualifies as “poor bookkeeping.”
Lacking entries and reconciliation.
For the small business owner, time is working against you when it comes to recording daily entries. Failing to establish a meticulous habit of reconciling bank statements, credit card statements, and other financial accounts can cause inaccuracy in financial statements and other reports as well. The main issue with inaccurate financial reports is that you do not have current information to assist you 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 cause confusion with Work in Progress (WIP), which may result in misrepresented financials. In most businesses, it is useful to pinpoint cost overruns at the time that they occur. This allows management to adjust the operation of the business, address vendor issues, and properly train staff 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 a lack of timely reconciliation. For example, if your company continuously outsources labor or buys products from vendors, multiple invoices will likely 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 materials on future purchases. These additional costs will reduce the profitability of your business and ultimately result in a lower purchase price when selling the business.
Tracking your receipts will prove to be a backup source of data to reference if needed during due diligence. Sometimes you will run into mistakes by expensing items that have no actual business expense during bookkeeping, thereby 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 inaccurate recording issues.
Waiting on your accountant to give feedback on the business summary.
Solely relying on your accountant to provide feedback on your business is not an accurate way of bookkeeping. Although they are building financial reports for your company, your CPA is not looking at the current data. When trying to make decisions promptly, 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 businesses that can access financial data at any point in time. This practice reduces the buyer’s risk and allows them the clarity and understanding of financial and operational needs as they occur during the normal course of business.
2. Risks Associated with Poor Bookkeeping and Financial Inaccuracies
Buyers Assume You’re Hiding Something
Inconsistent books can make buyers reluctant to close a transaction; they fear the seller is trying to hide something. Inaccurate bookkeeping opens the door for the buyer to revise the agreement terms, perhaps reducing the purchase price or introducing a seller note as additional security that the financial condition of the business is accurate.
Reduced Odds of a Successful Sale
When a company is presented with sloppy books, it is a poor representation of the 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 lacks the information to 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 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 not only throw your company into financial stress but can also cause you to waste time correcting poor business decisions. This takes 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, the 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 before 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, you may be held accountable. This could harm you financially and cause you to accumulate legal fees.
3. How to Resolve Issues and Improve Bookkeeping Organization
Hire a professional bookkeeper.
Hiring a professional bookkeeper is very wise when it comes to running a successful business. Many owners of small businesses think they can save money by keeping up with the books themselves or with a cheap hire. Bookkeeping can be seen as an expense. Using a cost-cutting method for bookkeeping opens the door to 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 the transition of the business, post-closing. Buyers do not want to spend most of their transition time on accounting data entry; they want to spend it with customers and staff.
Keep essential information at your fingertips.
Decision-making is the main factor that can hold buyers back from purchasing a business. Buyers who 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.
Accurate bookkeeping is essential when selling your business. Viking’s exercise of gathering, inputting, and comparing your data to other similar businesses and successfully closed transactions is our first step and best practice. We believe this step is the beginning of determining when it is the right time financially for you to sell your business.
The best way to plan a successful business exit is to do your homework ahead of time, evaluate the risks, and assess any weak spots in your business. As a business owner, it’s critical that you always remain a step ahead of the curve and knowing which potential deal killers threaten the sale of your business will prove to be a beneficial starting point. We also highly recommend building an advisory team that includes a CPA, an attorney, and a professional business broker to ensure that your best interests are always at the forefront of the deal. If you are interested in discussing the possible sale of your business, contact us at Viking M&A – we are here to help.
Deal Killer Series Part 1: Client Concentrations
Deal Killer Series Part 2: Unresolved Issues
Deal Killer Series Part 3: Human Capital Concentration
Deal Killer Series Part 4: Over Valuing Assets and Inventory