When a potential buyer’s interest is piqued, they’ll want to review your financial statements in order to perform a valuation on the company. However, this can be a problem if your books are a mess. It’s common for many mom and pop shops to use Quicken or QuickBooks, but not every software program will have the right accounting solutions for your business. You want to make sure that the right accounting practices are set in place; otherwise, you have a major cause for concern. From a seller’s standpoint, here are some reasons why this is a problem:
There are many different metrics used to value a company – some are based on revenue, EBITDA, or replacement costs – but all of them use information from the company’s financial statements. When it comes to valuation, one thing is certain: without reliable financial statements you’re better off licking your finger and putting it up in the wind. If this is the case, there is no valuation to perform and a company without a price tag can’t be sold. Even if you get a potential buyer to work with you through this issue, there will still be disputes later on concerning the purchasing price in order to close the deal. Often when public companies are acquired, a third party is hired to conduct a Fairness Opinion. The third party (most likely an investment bank) performs a valuation and reviews critical information, including the financial statements, in order to conclude whether the purchase price is “fair.” This is also used to avoid lawsuits from shareholders who feel they’ve been wronged in a transaction. As far as the seller’s interest is concerned, though, having reliable financial records is essential in order to get a high offer for the company. A subpar effort to maintain the books is only selling yourself short.
Another reason why potential buyers shy away from messy books is because a business owner who is careless, or even fraudulent, with their financial statements is likely to be careless or fraudulent with other important aspects of the company, as well. What investors want in a CEO is someone with integrity, honesty, and transparency. There is enough risk as it is with industry trends; rolling the dice on the management team is unacceptable for investors. The easiest way to discredit your ability to run a company is to, again, give a subpar effort to maintain the books.
The final reason why shoddy financials are a problem, although many more can be named, is because they make an already tedious process harder. If you invest in the aid of an M&A advisory firm, they’ll have a checklist to make sure that you have everything ready before approaching potential buyers. The due diligence can be the most time-consuming part of the selling process and nothing will add to the list of buyer’s questions more than messy books. Without a doubt, M&A advisors will be quick to bring to your attention the need to “clean house” and to hire a competent accountant to prepare reliable financial statements. The selling process already requires so much paper work, negotiating, and due diligence that trudging through convoluted financials won’t be worth the effort. At the end of the day, there’s no substitute for defending the value and credibility of your company than maintaining professional and reliable financial statements.
Here are a few examples of common accounting issues: