Why Poor Financial Records Cost Business Owners When They Come to Sell

When you’re trying to sell your business, there’s one thing every potential buyer will ask for—proof. 

Proof of your value, proof of your business’ financial position, proof that what they’re buying is in a healthy and stable condition. This proof will come in the form of records, typically around your financial history. 

However, being a busy business owner means sometimes the pile of important paperwork gets the better of you, and things fall through the cracks. 

Ensuring you record all your financials is absolutely necessary if you have any plans for selling your business. 

We’ll show you what happens when business owners don’t maintain important business records, why it’ll be more challenging to leave your business, and how it will ultimately devalue your years of hard work.

You don’t have three years of accurate financials

Numbers tell a story. However, it can’t just be a summary, you need a beginning, a middle, and an end. This is precisely what buyers want to see.

Having at least three years of financial records will not only demonstrate to future buyers the condition of your revenue streams, but you will also demonstrate your ability to be professional, which will benefit you and your business’ reputation. 

Not keeping detailed records of every financial interaction might seem like small, unimpactful decisions, but they will eventually bleed into every corner of your business and even your professional life. As a business owner, you also have a reputation in the market to uphold. So, whether you’re selling your business to retire or to invest in a new venture, it’s nonetheless important you have near-perfect financial records.

Hugh’s Story

As every business owner knows, you can’t do everything perfectly. However, when it comes to selling your business, your financial records need to be perfectly polished.

After running a hospitality business for several years, Hugh was looking for an out and engaged with our expertise.

We were pleased to see that since he began his business, he had kept diligent and accurate records of his accounts. Not only had he recorded all his financial transactions, Hugh made sure they were detailed so there was no risk for confusion.

Moreover, he had developed a reputation with his staff and suppliers for being thorough and trustworthy.

Hugh had the necessary three years of detailed financial records needed for selling a business, putting him in a strong position. However, while his accounts were good, there was room from improvement. After taking a look at his records, Cash Out Catalyst was able to propel Hugh’s records from good to great.

Combined, this painted an attractive picture for buyers. He was able to win the confidence of potential buyers who could immediately see the value and strength of his operation.

In the end, Hugh received lots of interest, and the company was successfully purchased for more than Hugh could have hoped for.

Record, respect, repeat

Recording your business’ financial activities is more than just the numbers. These numbers feed into the larger picture of your business, which includes your relationship with your employees, your suppliers, and your moral integrity.

By looking at what you’ve recorded, buyers will be able to read between the lines, and if they like what they’re seeing, the chances of finding a buyer are significantly increased.

Your numbers don’t tell a story

We’ve mentioned how numbers need to tell a story. They are strong indicators how well a business is doing, how involved an owner is, or can even help explain changes in revenue.

The story is in the details, so if you aren’t keeping precise detailed records, your financial story will be incomplete.

However, numbers can be shaped and structured to showcase a business that is valuable and desirable to prospective buyers.

Mary and Mark’s story

Mary and Mark had dedicated the majority of their lives to their jointly owned civil construction business for over a decade. As they were getting older, they wanted to start thinking about preparing for their well-deserved years of retirement and make sure they were financially set up to do so.

Both knew their books weren’t quite in line with what they hoped to sell the business for and use as their retirement fund.

Mary and Mark did the best thing any business owner could do—they got in touch with us.

They informed us that they had recently taken a step back from the business. Despite this, the business was still operating and growing all on its own. We advised them that it was vital that this important detail be included in their financial records.

Mary and Mark followed our advice and ensured their records showed less and less of their involvement and how their revenue continued to increase.

By listening to our expertise, Mary and Mark set themselves up for a profitable sale.

Record for retirement

While Mary and Mark were able to attract a buyer, we encourage other business owners to think at least three years in advance rather than Mary and Mark, who only planned two.

From our experience, it takes a business at least a year to systemise and replace and a minimum of an additional two years to prove financial stability. Had Mary and Mark done so, they would have been able to sell their business for five times its value.

So, if you’re thinking about living a comfortable and stable retired life, start planning and keeping good records now.

Your books are reducing your value

Your books are the bible of your business, so it shouldn’t be too much of a surprise to learn that if you don’t record everything, you won’t be able to sell.

We’ve also seen how keeping up-to-date and accurate financial records keeps your business looked polished and attractive to potential buyers.

For this, communication and diligence are key. The bottom line is that you need to record everything and ensure everyone who could be involved in the sale is on the same page.

Cora’s story

Cora had worked hard to create a successful import/export business. She spent years building relationships with suppliers, monitoring lines of distribution, and managing foreign buyers. None of this was easy, but it had allowed her to live comfortably.

Like any tired business owner, Cora was ready to be done with the business and move on to a new life that didn’t keep her tied up on the phone all day long. On the outside, it looked like everything ticked all the boxes. However, upon closer inspection, we realised it was quite the opposite.

Despite years of success, Cora had run into personal cash flow problems. Wanting to get out of her business combined with needing to come into a considerable amount of cash quickly meant Cora had created a pressuring situation for herself. She also hadn’t been recording the financials properly, with the books showing over a million dollars in revenue missing.

On top of that, she neglected to tell her key internal staff that she had begun the process of selling. Unfortunately, this meant that the issue with the books fell through the cracks, and
not all of the important documentation was collected to prove the business’ value.

However, because Cora engaged with Cash Out Catalyst, not all hope was lost.

We helped organise her financials and structure them in a way that was appealing to potential buyers. As a result, Cora successfully sold her business and was able to move on to a more relaxing, stress-free life.

Although we were pleased to see Cora get to enjoy her new work-free life, we know that had she kept proper financial records, she would have likely gotten a lot more out of the sale of her business.

Record your revenue

This might initially seem like a fundamentally basic tip. Still, it’s one that we consistently push because we’ve seen what happens when business owners don’t stay on top of their financial records.

The problem most business owners face when it comes time to sell is that they realise they haven’t been properly recording their financials. While you might know how much money your business is generating and what your future plans are, you need to get all of that information out of your head if you have any hopes of making a sale reflective of your years of hard work.

Record everything to sell at the highest value

If you’re thinking of selling your business, your first stop should be to your books. Check to make sure you’ve been recording detailed and honest accounts of your financials and make sure you implement exit strategies at least three years ahead to achieve maximum value. Lastly, communicate your plans with the rest of your team and ensure that your books reflect your healthy stream of revenue.

When you engage with Cash Out Catalyst, we can help advise you on the best course of action unique to you and your business. We have vast experience with business owners who are facing recording challenges and have showed them how to tell their financial story led them to receive the payday they deserve.

As you were reading, you may have thought of a business owner that would find this blog helpful. Please share it with them – I’d appreciate it.

Finally, I’d love to know which of the three ways that recording can transform your business would make the biggest difference to you? Let me know below – I reply to every comment.

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