GET FINANCIAL RELIGION BEFORE PUTTING YOUR BUSINESS UP FOR SALE
There is no better time for small business owners looking to sell their closely held business. However, small business owners hoping to cash out can quickly discover that issues with their internal financials can become a roadblock to a successful sale. Disorganized or missing financial or corporate records can turn off potential buyers, who demand complete transparency when buying a business. Financial mistakes that can derail a transaction include:
Inaccurate inventory reports. With no one to hold them accountable, a small business owner’s main focus can be to minimize taxes. When business owners artificially lower inventory so the cost of their goods increase, it can cause tax issues at the end of the year. Over-reporting or under-reporting inventory, can lead to owners misreporting their taxable income.
Not using an accountant, professional bookkeeper or computerized account software. With a limited number of resources available, some small business owners try to be their own bookkeeper despite being unqualified. When small business owners don’t have a proper accounting system in place to track their income and expenses on a daily basis, it is difficult to get a good understanding of the earning potential of a business.
Failure to report all cash sales. Sellers can adversely impact the value of their business if they intentionally conceal cash transactions, such as pocketing cash from sales in order to avoid paying income and sales taxes. Since businesses usually sell for a multiple of cash flow, it’s in an owner’s best interest to report all income for a multi-year period ahead of a sale. A multiplier received on that cash flow will usually offset any taxes paid on the higher reported income.
Get Financial Religion. Beyond attracting potential prospects, organized and accurate financial records can help business owners identify what parts of their business need attention to prepare it for a sale.
The good news for sellers is that many of these mistakes are fixable, but getting the financial records in shape for a sale takes time and work. Correcting financial records to satisfy a buyer can take several years to fix. Some sellers may want to remove their personal expenses from the business financials and take steps to ensure their financial records match their tax returns. Owners should consider hiring an experienced bookkeeper and waiting until the business financial records appear credible to a prospective buyer.
Accurate financial records can also qualify your business for a Small Business Administration loan. If a business doesn’t have accurate and understandable financial records and tax returns, it won’t qualify for an SBA loan, Often, incomplete or inaccurate financial records can force a seller to offer seller financing, prolonging the seller’s exit.
While this is a great time to be selling your business, financial mistakes and inaccurate or incomplete financial records can quickly derail a sale. If you are serious about selling your business, there is no time like the present to get financial religion and begin cleaning up your business finances.