Make sure your bookkeeping is well-oiled before a valuation!
Imagine you’re selling your car. To get a good price, potential buyers need to see it’s in top condition. The same goes for your business. When it’s time to sell, its financial records are like the car’s engine – they reveal its true worth. Here’s why meticulous bookkeeping is essential for a smooth and successful business valuation.
Separating Business from Personal
A core principle in business valuation is maintaining an “arm’s-length” relationship between the owner and the business. This means keeping personal finances distinct from business finances. Why is this crucial?
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Transparency and Trust: Clear separation demonstrates financial responsibility and transparency. Potential buyers can confidently trust the reported financial health of the business.
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Accuracy and Objectivity: Business records free of personal expenses eliminate confusion and provide a clear picture of the company’s true performance.
When Personal Expenses Cloud the Picture
Unfortunately, many businesses (around 95% in our experience) have personal expenses mixed into their financial records. This is like muddying the water – it obscures the true picture:
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Difficulty in Valuation: Sorting through personal expenses adds unnecessary complexity to the valuation process. It becomes a guessing game, increasing the perceived risk for potential buyers.
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Reduced Sale Value: Buyers are wary of businesses with unclear finances. This often leads to lower offers or even cancelled deals.
The Value of Proper Bookkeeping
Imagine two businesses for sale, both with similar revenue, profit, and location. One has meticulously maintained financial records, while the other has a murky mix of personal and business expenses. Which one would you pay more for?
The answer is obvious. Clean and transparent books make a business more attractive and valuable to potential buyers. They eliminate guesswork and demonstrate responsible management.
The Perception of Risk
Business valuation isn’t just about hard numbers. Even if a valuer can partially “filter” the muddy water, the perception of risk lingers for buyers. They might be hesitant to pay top dollar for a business with unclear financial history.
The Takeaway
Maintaining clean books isn’t just good accounting practice; it’s an investment in your business’s future. By keeping personal and business finances separate, you ensure a smooth valuation process, attract serious buyers, and ultimately, command a higher sale price when the time comes. Remember, clear and transparent financial records are like a powerful engine – they propel your business towards a successful sale.
Read our other blogs:
Future-Proofing Your Business: How Great Valuations Can Help
Building a Strong Business Continuity Plan
