“Their record keeping system was chaos. They did a lot of business if you went by how busy the employees were, and how often trucks carried products in and out of the warehouse. But the records they had were unrelated to reality . They had “re-created” their accounting system 2-3 times in the last two years. They we’re constantly behind in filing reports because they had no ideas how to answer the questions they were asked.
Their bank was unhappy, the IRS was unhappy, and their employees were unhappy. So finally, out of desperation, the owners decided to try to sell the business – and then they were really unhappy.”
Dirty records? It doesn't matter why.
If your records are inaccurate, it doesn’t really matter why. Dishonesty, lack of skill, employee turnover, laziness, more important things to do – the reason isn’t really that important. What’s important is that you understand that the only results you really have are those you can document
If you can’t prove your results, then the results aren’t real.
You Know the question. Here’s the Answer
Can you document your results? That’s one of three questions you must answer about the results your business generates. If you are going to document your results, you must:
- Keep clean records
It Is What It Says It Is
Your financial results are what your tax returns say they are. Those are your results. That is what your buyer’s banker is going to look at to determine how much (if anything) they will loan to buy your business. But it’s not just your tax returns that represent documented results:
- Do you have written agreements with your clients?
- Do you have employee contracts?
- What formal agreements do you have with your vendors?
These items and many more create the environment that your business operates in. Is the environment consistent? Is it documented? Will it continue when a new buyer takes over? Can you prove it?
A Buyer Will Confirm What You Tell Them
Most business sales have a stage known as due diligence. It’s where the buyer, their banker, accountant and attorney review and confirm the truthfulness of what the seller has been telling them throughout the discussions. The depth and length of this process will depend on the size of the deal and the experience of the buyer.
At the very least, the buyer’s banker is going to require official tax returns that document the results being used to support the payment required on the loan.
To pass this inspection, your records must be accurate. We’re not talking about perfect, with everything crisp, clean and meticulously organized (although that certainly has never hurt a sale). But your records must allow your buyer to follow an entry on your tax return through to the support documentation to prove out the transaction.
- Are you just messy when it comes to your accounting? If you are, it can lower, or eliminate the results being used to justify the purchase.
- Are you being actively dishonest with your records? If so, the game is over before it starts. You’re stealing from yourself, the IRS, and you’re attempting to deceive your buyer.
“But those are my real results, although I can’t prove it.” We understand, but your buyer won’t. No one is going to take your word for it. Prove it, or it didn’t happen.
Keep clean records. Use them to document your results so you can sell your business when you are ready.
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