Business Broker Blog

Clean up Your Books if You Want to Sell Your Business!

  

  

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This should be obvious but I come across this time and time again. I guess if the small business owner is not financially savvy - and usually they are not - they focus on what has made them successful and skimp on the accounting. But this is a mistake. Take the time to set up your accounting and spend some time with your CPA so you know what you are looking at. Do this early in your business lifecycle. Like any small business owner, I'm sure you'll want to expense as much as you can so you minimize your taxes - just make sure you can identify those items that are discretionary (e.g. Not absolutely necessary to the operation of the business) so they can be segregated later.

It is amazing how some business owners are able to bury their profitability so deep in their financial statements that no one can find it. This doesn't just apply to those "cash" businesses with revenues of $200K a year either. I recently analyzed (I suppose "analyze" is what I was doing as I tried to make sense of them) a company's financial statements - it was a nice niche distributor with over $3 million in annual sales. I looked at every expense line item in Quickbooks and I couldn't find more than $80K in cash flow (discretionary earnings including the owner's salary).  Granted there are plenty of companies with marginal profitability - but I know this isn't one of them. (And not just because of the vehicles the owner and his wife are driving.) I'm just having a hard time with finding the earnings. I'll take it to a deeper level and I'm sure I'll find them, but then we have to convince potential buyers that the company is worth what we say it is, which is that much harder because of the poor quality financials. SO:

1. Clean up your financial statements. Set up a logical Chart of Accounts and keep it consistent year after year. Segregate discretionary expenses.
2. If you are big enough, have your CPA prepare compiled, reviewed, or even audited statements. These are progressively more expensive but can be worth it during the 2-3 years leading to your planned exit.
3. Contact us or another qualified Business Brokerage or M&A Advisory Firm if you have any questions.