Tax season. It's the time of year business owner's dread. Writing a check to the IRS is never fun, but the process of sorting through receipts and compiling coherent financial reports can be excruciating--unless you have done a decent job maintaining your financial records throughout the year. With good bookkeeping, tax preparation can be a relatively painless process.
From a bookkeeping perspective, selling a business is similar to tax season. The more time and energy you invest in maintaining good financial records before the sale, the easier it will be to prepare required financial documents and accurately present your business to buyers.
Solid financial records are a critical part of the sale process because your company's financials will either validate or disprove the claims you present to sellers. For example, if you tell buyers that the business has a five-year track record of year-over-year growth, you better be able to provide earnings statements and balance sheets that support the company's growth trend.
Understandably, shoddy or incomplete financial records raise red flags for potential buyers. Typically, sellers who lack proper financial records experience longer selling cycles and receive lower prices for their companies than those who are meticulous about bookkeeping and financial reporting.
Even if you don't plan to sell your business for several years, you have a lot riding on the quality of your bookkeeping and financial reporting routines. Here are a few tips to help you prepare your books for a sale--whenever the sale occurs.
1. Prioritize investments in bookkeeping and financial recordkeeping.
Small business owners wear many hats in their organizations and it's easy to push bookkeeping responsibilities to the backburner. But what many business owners don't realize is that poor financial records have a bottom line cost, both at tax time and when the business is sold. If you don't have the time or skills to maintain your company's financial records yourself, invest in a part-time bookkeeper and/or accounting solution to ensure the integrity of your financial records.
2. Organize financial documents early in the sale process.
Perception is everything in a business sale. If your financials aren't prepared and formatted for the marketplace, buyers may begin to question whether the business is a good candidate for acquisition. For sellers, it's essential to begin the organization of financial documents early in the process and to avoid taking the business to market until all relevant financial records are in place.
3. Create a high-quality financial records package for buyers.
Present buyers with a well-organized package of high-quality financial documents that contains key information about the business (e.g. inventory and staff lists, a current client list, tax returns, etc.). To determine and assemble the right financial documents package for your company in your situation, speak with your business broker or accountant. However, here are some of the documentation records that are universal to nearly every business sale:
- Current and past financial statements
- Records of business purchases and bills of sale
- Statement of seller's discretionary earnings or cash flow
- Financial ratios and trends
- Accounts payable/accounts receivable reports
- Non-disclosure or confidentiality agreements
- Marketing plans and samples of marketing material
Good books are the sign of a well-managed business. By maintaining financial records on a consistent basis and preparing a first-rate financial package for buyers, you can project confidence in your business skills and assure buyers that your business is worth every penny.