If you ever want to sell your business, stop ignoring the financials.
Entrepreneurs run their financials with gut instincts. Typically, they use four key elements: cash, receivables, payables and sales. While not taught in any undergraduate business classes, it’s standard form standard form for financial management.
If done properly, you maintain the financial integrity of the business.
Unfortunately, what you find in reality is countless businesses with little to no financial integrity. You may be asking how this happens.
Every business needs three legs to hold it up: sales, operations, and finance. Growing sales or improving operations take the forefront. Countless entrepreneurs leave the financial reporting for last. Often times it’s never addressed at all.
The end result is financial reporting gets swept to the side.
When you sweep finance under the rug, you cut out one of your support legs. Without immediate consequences, this practice persists throughout the life of the business.
The end result undermines any financial integrity in the business.
I get it. Running a business is comprehensive and exhaustive. You do what you need to do to keep afloat in the moment.
Fast-forward several years, or decades, and this creates problems selling the business. Poor financials prevent countless deals from getting off the ground. Others crash and burn due to discrepancies in the books.
Let me repeat: if you ever want to sell your business, stop ignoring the financials.
Interested buyers evaluate the risk for their investment based on your financials. It requires reviewing two years of books, with a preference given to five years. Loosey-goosey books undercut the value of your business tremendously.
This afflicts more than tiny businesses. It plagues businesses up to the $25 million mark. After a business reaches $30 million, they tend to bring in qualified corporate accountants.
Let’s break the financials down.
It has two areas: accounting and finance. They differ as much as sales and marketing. Accounting is the traditional bookkeeping role. You report all the financial activity to generate reports. The guideline and rules to follow are called GAAP (Generally Accepted Accounting Procedures).
Accounting is responsible for the accuracy and integrity of the numbers. This builds a foundation of trust for bankers, IRS, buyers and others when they look at the numbers. Everything is precise and timely. Think of this as hard data. No speculation, solely facts.
Numbers are great, but decisions are built on strategy and projections.
Enter finance. This takes the numbers from accounting and produces managerial reports to analyze data. Here you find historical reports on sales conversions, trends, graphs and projections. This builds financial models to validate a business model or confirms viability for a loan to be paid off. In short, it converts financial data into business speak.
Most businesses are too small to have two departments for sales and marketing, much less accounting and finance. Understanding the fundamentals is key, especially if you are looking to eventually sell.
Without fail, financial reporting integrity is a buyer’s first question. If you want to sell your business, you have to have reliable financials. At the very least, you need accurate and timely financials based on GAAP. Buyers can then build finance projects to determine their risk and potential ROI.
Otherwise, what you find is decades of mishandled books. To top this off, the entire financial strategy is built around eliminating taxes and running personal expenses through the business. You’d be amazed at what I find when I dig into the finances: motor homes, cars, children collecting nonbusiness related salaries, tax deferment and more.
If your ultimate exit strategy involves selling your business, you need to start managing your company to appeal to buyers. This means crisp, clean and accurate books, eliminating personal expenses, maximizing profits and built on reliable financials.