The Importance of Accurate and Timely Financial Information

If you are thinking of selling your business, I cannot over emphasize the importance of addressing the need for accurate and timely financial information.  Most sellers want to maximize the price that they get for their business and keep the maximum amount of cash received at the closing table.

In order to achieve these objectives, one or more lenders are typically involved.  This means that not only will the prospective buyer and its team of accountants be scrutinizing the financial records, but the lender's analysts will be spreading the numbers.  Usually this financial due diligence will be for a minimum of three years, but it is not uncommon for a five-year look back period.

Below are several suggestions for making this process faster, less stressful, and more conducive to achieving a better price structure for the seller.

Use a Quality CPA Firm - When you are trying to maximize the value that you get for your business (and perhaps your standard of living in retirement), you do not want to have less than quality representation in reducing taxes and having a proper paper trail.

Inventory - One of the more common problems that we encounter involves improper reporting of inventory.  Without an accurate yearend inventory, it is impossible to compute an accurate Cost of Goods Sold for the period, and without an accurate Cost of Goods Sold number, you cannot have an accurate Operating Profit.  It is also important to write off obsolete inventory on a regular basis.

Work in Progress - Similar to inventory, not maintaining an accurate value for work in process can distort profitability.  This becomes important at yearend and at the time of closing.

Timeliness - We have a saying in our office that "time is the greatest threat to completing a transaction."   Although filing for extensions may be acceptable if you are not selling your business, it can be fatal if you are trying to sell your business.  For example, we have a business with two offers pending and we are still waiting for yearend financial statements to counter those offers with financial justification.  Both buyers are getting anxious and may be exploring other acquisition options.

(originally published in March 2015 eNewsletter)