One of the biggest struggles we have with our entrepreneur clients is that they have lousy financial statements. Many times it’s from lack of caring and know-how, but sometimes it’s done intentionally.
How does a professional advisor, such as a banker, lawyer, accountant, or business broker advise their client when the business financials consist of a check book and a box of receipts? Or the situation where the business owner has one cash register that isn’t connected to the accounting system (because that one is for unrecorded cash), or the owner runs all personal shopping through the business, or takes a family of 15 on a European vacation on the business, or doesn’t use an accountant or bookkeeper at all? The company’s tax return doesn’t resemble (in the slightest) the profit and loss statements and balance sheets. The examples of poor record keeping and tax dodges that we see go on and on.
Let’s focus on the value of the business based on quality of financial statements for this blog. As mentioned above, advisors are hard pressed to advise a client that has poor financials. We need to see revenue and margin trends, the relevant expenses, cash flow, sales by customer, liquidity, and much more. We need to know the true picture to know how the business compares to similar businesses in the industry, to recognize trouble spots, to find opportunities, to budget, and to plan an eventual exit.
The Exit: When a business is entertaining a potential buyer, will the buyer see a true picture of the business immediately or will they have to dig for the truth? The more they have to dig, the less trust they will have in the management (and the value of the business just went down). Will the buyer see a concerted effort to avoid paying taxes? What else might the seller be hiding? Can the buyer trust the seller (and the value of the business just went down)?
In most situations the buyer needs a bank to fund an acquisition. Banks don’t trust anything other than the tax return (and for good reason). You can see where this is going, can’t you? The bank doesn’t like the financials because they don’t match the tax returns, the tax returns don’t show enough cash flow so they tell the buyer that he is paying too much for the business (and the value of the business just got reduced again!).
Having accurate financial statements is not difficult, but it does take some focus and action. If you need help with getting your books in order, Apex Business Advisors can direct you to a local professional. It’s ok to ask for help!