Originally published by Drew York.
This is the fourth installment of a series discussing potential pitfalls that JR and Sue Ellen Pawlenty, who own Pawlenty Energy, should be wary of when they are trying to sell their business. Recently, Tilting the Scales highlighted Successfully Selling Your Business: Top 6 Potential Pitfalls; So You Might Sell Your Business Someday: Do You Need a Broker?; and Successfully Selling Your Business: 4 Tips – No Matter the Buyer. Today, we’re going to discuss why it’s important for your business’s financial records to be in order.
Avoid Losing the Sale
Many business sales begin with a letter of intent that gives the buyer a due diligence period to investigate and evaluate the business. Inaccurate financial statements will send up a red flag for potential buyers and probably cause them to walk away from the sale.
Potentially Avoiding Litigation
When there’s a falling out between the buyer and seller after the sale, particularly where the business isn’t doing as well as it was before the sale, the buyer usually complains that the seller’s financials were inaccurate. Although you can’t control whether the buyer sues you, you can create a paper trail during the course of the sale that will make it easy to present your defense. One way to do that is to pay your accountant to perform an audit of your financial statements before you put the business up for sale.
Boosting Your Business’s Market Value
Inaccurate financial statements might also lead to a below-value sale. For example, if your financial statements inadvertently omit the extra $100,000 in revenue you made last month, the business doesn’t look as valuable to a prospective buyer, meaning you will probably sell the business for less than it is actually worth. You should also consider having the business appraised.
Other Important Records
If your business is regulated by the local, state or federal governments you want to make sure all of your required licenses are in good standing. Potential buyers who discover that a business’s licensing is not in compliance will question whether the business’s financial records are also sloppy.
If you incorporated your business, you need to make sure that you have filed all necessary documents with the secretary of state.
You may also want to consider obtaining an environmental audit of the property where your business operates if you handle hazardous chemicals.
Tilting the Scales in Your Favor
Although getting your financial and other documents in order may take some time and cost some money, doing so before you put your business up for sale will save you from surprises later on. If a buyer finds flaws, it will delay the sale, may cost you the sale and may have cost you other potential buyers while you were trying to fix these problems.
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