Financial Integrity in Selling a Business
The lack of financial integrity is one of the most common hurdles encountered during the process of selling a business.
Reliable financial records are not only a critical element of business management but also support the business’ leverage, profitability, operational efficiency, and its solvency. In the purchase of a business, the buyer will be performing (or hiring an accountant on his/her behalf) some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past and current financial performance, there is a strong probability that a deal will not be in the making, or at best, the company will be valued at a reduced value.
If a buyer faces a seller of a business who asserts that the company has been profiting, say, $300,000 per year for each of the past three years, the seller will be required to prove it. If the seller then produces past financial statements that do not support that claim, are incorrect or incomplete, the buyer will most likely become wary and skeptical and walk away from the opportunity deeming it too risky and not represented with integrity.
Therefore, it is a good idea to know everything you can about your business’ financial statements and position now, so that you can avoid surprises later when a buyer is performing due diligence. You should be ready with the answers to the questions that will assuredly be asked. Manage your business financials so they are transparent, reliable and up-to-date. Buyers want to see a detailed financial history in well-kept books and will not pay top dollar for mediocre records. It is prudent to have your financial records updated after the end of each fiscal month in anticipation that a potential buyer will be asking for those records anyway. Waiting for the buyer to request them only prolongs the effort and the added time spent that will be needed to produce these financial records will only provide the buyer more time to re-think his/her position and additional opportunity to look at other businesses that are also for sale.