You’ve Got a Buyer for Your Business. Are Your Books Ready?

A Financial Reality Check

You’ve spent years building your business. You’ve found customers, managed employees, paid bills, solved problems, and kept everything moving.

Now someone is interested in buying it.

That is exciting news.

Then they ask to see your financials.

This is often the moment when business owners find out whether their books are truly ready for someone outside the business to look at them.

Maybe you started out doing a great job keeping everything current. Transactions were posted. Bank accounts were reconciled. Receipts were entered. Payroll was recorded.

Then you got busy running the business.

A month slipped by. Then another. Some transactions were entered, others weren’t. The bank account hadn’t been reconciled in a while. Payroll was coming out of the bank, so you knew everyone was getting paid, but you weren’t completely sure how it was being recorded in the books.

None of it stopped you from operating the business.

Until now.

A Buyer Is Going to Ask Questions

A potential buyer wants to understand what they are buying.

They may want several years of financial statements. They may look at revenue trends, expenses, debt, cash flow and historical earnings. Depending on the business, they may also be looking at working capital, assets, liabilities and EBITDA.

And they are probably going to have questions.

Why did this expense increase?

What is included in this account?

Why doesn’t this balance agree with the bank?

What does the business actually owe?

Are these expenses really business expenses?

Can these financial statements be relied upon?

Those questions are difficult to answer when the records behind the financial statements haven’t been kept current.

The Bank Balance Isn’t the Answer

One of the easiest traps for a business owner to fall into is looking at the bank account and thinking the business must be doing fine because there is money in the bank.

Your bank balance tells you how much cash is sitting in the account today.

It does not tell you the whole financial story of the business.

It doesn’t tell you whether all of your expenses have been recorded correctly. It doesn’t tell you what you owe. It doesn’t tell you whether payroll taxes or other liabilities are properly reflected. And it certainly doesn’t tell a potential buyer what the business actually earns.

That is what your accounting records and financial statements are supposed to do.

But they can only do that when the information behind them is accurate.

Reconciliations Matter More Than Most People Realize

A bank reconciliation is more than checking a box in QuickBooks.

It is one of the ways we determine whether the activity recorded in the accounting system agrees with what actually happened in the bank account.

When accounts haven’t been reconciled for months, or sometimes years, problems can accumulate.

There may be duplicate transactions, missing expenses, old outstanding items, incorrect deposits, transfers recorded twice, or transactions posted to the wrong accounts.

And because one account often affects another, fixing one problem can uncover something else that also needs attention.

That is why catching up the books isn’t always as simple as entering the transactions that appear to be missing.

Sometimes the books need to be reviewed before you even know what needs to be corrected.

Your Financial Statements Tell the Story

When a buyer looks at your financial statements, they are trying to understand the business you built.

The profit and loss statement should help explain how the business makes money and where that money goes.

The balance sheet should show what the business owns, what it owes and what remains for the owner.

If those reports contain old balances, unreconciled accounts, improperly recorded payroll, personal expenses mixed with business expenses or other inaccuracies, the financial statements may not tell the story you think they are telling.

That doesn’t necessarily mean you have a bad business.

It may simply mean the accounting records need attention.

But when someone is considering buying your company, you would much rather discover those problems before they do.

Don’t Wait Until Someone Is Asking for the Numbers

If you think you may sell your business someday, even if “someday” is a few years away, keeping the books current gives you options.

It also gives you something every business owner should have whether they plan to sell or not: reliable information about their own company.

You should be able to look at your financial statements and have a reasonable level of confidence that they reflect what is actually happening in the business.

Because once a buyer, banker, investor or another outside party asks to see them, there may not be much time to go back and reconstruct several years of financial history.

Accurate books are essential, but when you’re preparing to sell your business, they can become something even more important: part of the story of what you’ve built.

Come back next week for Part 2, where we’ll talk about what it actually takes to clean up books that have fallen behind, and why cleanup costs more than regular monthly bookkeeping.