What does it mean to have your books in order before you sell your company? Everything.
When it's time to sell your business, you've likely invested great effort and resources into making it a valuable asset. However, inadequate accounting practices can significantly diminish the perceived value of your business during the sale process. The records you keep will underpin your organization and, if not managed properly, have the potential to upend your company.
However, if done right, your financial records can tell an important story — the story of your business — to any and all of your company’s current and future stakeholders, including potential buyers and investors. And that story can make or break the deal you’ve worked so hard for.
Here are 10 ways keeping solid accounting records can enhance the profitability of your sale.
Transparent financial records are a fundamental requirement for potential buyers. Vague accounting records can sow doubt and mistrust, leading prospective buyers to question the credibility of your business' financial health. Creating a clear and air-tight financial “paper trail” is crucial for establishing trust and for a successful sale.
Insisting on solid accounting practices in your organization leads to financial statements that are free from inaccuracies, inconsistencies and discrepancies. That’s important, because accurate and reliable financial reporting is essential to help buyers evaluate your company’s past performance and future potential. The more reliable your financial statement reporting, the more buyers will view your business as a good investment — helping the deal come to life and potentially even driving up the price they are willing to pay.
And it is a process. Throughout the due diligence phase, potential buyers will scrutinize your business’ financial records to gain a deeper understanding of its operations and financial health. Complete and organized accounting records can make the due diligence process go more smoothly and save time for both parties. This in turn gives you, as the seller, the upper hand when it comes time to negotiate the sale price.
Accurate and complete accounting records can go a long way in easing any concerns about the level of risk associated with your business. Your attention to the financial details of your company signals to potential buyers that you likely have taken care of other aspects of the business as well. This perception can lead to higher valuations and more buyers seriously considering your company.
Buyers often rely on financing to acquire a business. Lenders, just like buyers, require clear and credible financial records to assess risk and determine loan terms. Strong accounting practices that provide confidence to buyers will also provide confidence to lenders — helping buyers secure essential financing.
The value of a business is often based on its financial performance. So, it stands to reason that solid accounting records will help you accurately calculate the business' worth. You want to obtain the most realistic valuation estimates possible to avoid friction between you and a potential buyer during negotiations.
With solid accounting records, you can confidently negotiate from a position of strength, knowing the precise value of your business and having a transparent picture of its financial health. In contrast, poor records may cause you to concede more during negotiations, as you are unable to provide compelling evidence of the business’ true value.
Buyers are, for good reason, often wary of assuming potential liabilities. If faced with what they believe to be inaccurate financial records, they may require complex indemnification clauses and escrow arrangements to protect themselves after the sale, which can erode the final sale price. Help your buyer avoid additional exposure by having your ducks in a row. For example, have all of your sales and use tax certificates on file, as state and local tax issues are often a significant sticking point during the sale.
Having excellent accounting practices will contribute to your company’s overall reputation as being a solid and valuable asset in the eyes of potential buyers. Paying attention to financial details will offer peace of mind about the business' overall management and commitment to financial transparency. While somewhat of an intangible, protecting your reputation can result in higher valuations and more buyers who can envision a long-term future leading the company.
The longer your business stays on the market, the more its perceived value can erode, as buyers translate a prolonged sale period to mean underlying problems at the company. Adequate accounting records can expedite the due diligence and negotiation processes, reducing the time your business spends on the market and preserving its value.
To maximize the value of your business — even at the first thought of a sale — it's essential to maintain meticulous accounting records and adhere to best practices in financial reporting. By doing so, you can increase transparency, build trust with buyers, expedite the sale process, and ultimately secure a higher sale price that truly reflects the value of your hard work and investment.
Contact Caroline Jiang at cjiang@cohenco.com, Phil Ryan at pryan@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.