What is my Business Worth ? - Preparing the Books.
What is my Business Worth ? As I have referenced on other pages of California Business Broker .com - the value of your business is largely determined by your earnings and the quality of your financial records. Your financial documents are the proof and record of your earnings. In the absence of these records, the buyer is going to have to "take your word for it." As you can imagine - this will very much negatively affect the final price a buyer will pay. Not sure what documents you need?
Click here to review a list of financial statements that buyers want to see.
Your P&LS are "recast" to provide the SDE for the new owner. Expenses or income that are not on the income statement cannot be added back. If it is not documented, then it does not exist.
If your business does not have any records and you would like to sell it, priority number one is to start documenting the businesses finances. Even one year or six months is better than nothing. Remember, the goal is to maximize the seller's discretionary income, the amount that is the total benefit to the owner not to maximize net profit. You do not need to eliminate expenses that you run through your business. Those items will be added back.
If you are unfamiliar with SDE CLICK here for a primer. More notes on the - What is my Business Worth - question.
A side note, business brokers are not the IRS. You do not need to justify any expenses to me. If it is a legitimate add back it gets added back.
Your CPA can prepare your books. You can also use one of the small business accounting software programs. Quickbooks is the biggest name in this arena. If you need help with your quickbooks software, contact me. I can put you in touch with consultants who work solely with quickbooks.
Some business owners have been known to not report income. This is especially true with cash businesses. If this is the case for you business, you have two options. Continue to not report income and know that it cannot be used to justify an asking price or start reporting the income, pay the taxes for the time being and then use the reported income to sell your business. Remember - you can only prove your profit by showing some documents that show the income - bank statements, invoices, receipts, etc. can be used but generally it is less than ideal.
In the three years before you sell, try to keep your accounting as uniform as possible. Year to year accounting changes are confusing to buyers. It may cause unnecessary concern for a buyer. If you have a bookkeeper or CPA prepare you books, ask them not to change the way they prepare your books for the three years before you sell. If you have a personnel change in this area, make sure to have them prepare the books the same way as the person before them. Many times they will have a different opinion as to the best way to prepare these documents. Most likely, you will be the one trying to explain why a certain expense shot up or why income is down from year to year.
If you are asking yourself What is my Business Worth and if you are considering selling your business and you do not have financial records then the solution is to to prepare them. If you have an otherwise profitable successful business, then your lack of records are an easy fix. Have your CPA or bookkeeper prepare your documents. Then spend a year maximizing your profit, documenting your income and expenses. It may take longer but, rest-assured, your business will sell for a higher price than if you did nothing.
File any Late taxes Extension or no extension, past due taxes need to get filed. Lenders will not finance the transaction if the business or, in some cases, the owner's personal taxes have not been filed. Generally lenders need to see the most current year return to approve financing. (This applies to SBA and non-SBA loans) Virtually all business sales are financed. Without financing, the business probably will not sell.
Do you need help planning the sale of your business? Have you asked yourself - What is my Business Worth? Contact me to set up a confidential, complimentary consultation. There are never any upfront fees. I will work with you to maximize the value of your business.
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