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There are many things that can delay and even derail a business acquisition, but one of the top problems we see is a lack of clean financials.
Every business acquisition involves a detailed review of a seller’s financial records. Buyers will arrive at the acquisition table wanting to know how much risk they could potentially face, whether or not they will be able to run the business and if they can grow it. And the only way their questions and concerns will be satisfied is if they can review and fully understand the hard data (aka your organized financials.)
Does it make financial sense to invest in the business? Buyers won’t be able to answer this question without accurate business records to review. They need to see the value in your business before they will invest in it, and clean financials makes a business more valuable. Here are five reasons why:
1. Clean Financials Give Buyers a Better Sense for Their Potential ROI
Buyers acquire businesses for one reason: ROI.
You might hear this and think that it is too one-dimensional. After all, your business is much more than just the money that it makes, right?
The fact is, buyers do look at more than just the ROI your business can give them. A buyer could love your business and even feel emotionally connected to it. But unless they will receive a return on their investment, they will be unlikely to buy.
It’s not just business buyers who clamor for ROI; we seek a return whenever we invest time or money in something. If you spend money on a 5-star restaurant, you expect a 5-star return in the form of impeccable food and service. If you spend money at McDonalds, you may not expect 5-star food but since you visited a fast food establishment, you will expect a return on your time.
All buyers consider ROI when making their purchases and online business buyers tend to buy specifically for a financial return on investment. This financial ROI is the driving factor for all business acquisitions and clean, organized financials can show this to prospective buyers, increasing the perceived value of your business which increases the chance of a successful, timely acquisition.
2. They Help Quantify What Growth Looks Like
If you are selling your website, you will likely want to talk about it’s potential for growth. After all, since buyers are motivated by ROI, a buyer who acquires a website that is set for growth will have a stronger and faster return on their investment.
Keeping clean and organized financial records helps buyers place your business’s growth prospects in context.
In our Ultimate Guide to Website Value, I listed 4 elements that drive a website’s value: risk, growth, documentation, and transferability. In that guide, however, I warn readers to not confuse “potential” with “growth prospects”:
The more growth potential is measurable and predictable, the more likely it will positively impact the value of your business.
On the other hand, the more your growth potential is unpredictable, the less likely a buyer will consider it to be ‘real’ potential.
Clean financial records help you quantify growth potential. It places this potential in the context of an already existing operation and provides a starting point for calculations.
In a word, clean financials make your growth potential more believable.
3. Buyers Can Identify Inefficiencies (Which Makes Your Business More Valuable)
Clean financials also show prospective buyers where they can cut costs and save the company money.
- Is there a more efficient way to manage employees?
- Is there money being wasted on external resources that could be allocated internally?
- These questions cannot be answered without prospective buyers having a clear, undistracted view of what is going on financially with your business.
These three points (clear ROI, growth potential, money savings) show buyers what your business life was like and where it is headed—essentially they tell the story of your business. And this is paramount to a successful acquisition.
Tell A Story With Your Financials
Have you ever wondered about how much history is imprinted in a tree’s rings? Similar to how your scars, emotions and physical health tell a story of what you endured and also what you value in life, a tree’s rings reveal every external event that affected it from droughts, fires, massive rainfalls, and more. These rings leave an indelible mark on the tree and reveal its past, present and future.
Every decision you make, the shifting economy, industry changes, every person you hire and fire, every resource you use—it all impacts your business—and it tells the story of your business to potential buyers. Your financials are your rings, the place where buyers can discover the history of your business and the economy it went through. Buyers need to see this complete story, regardless of whether your business faced ups and downs, as it will make your business more real and tangible to them. This transparency is vital to a successful acquisition.
Buyers don’t care only about what you say; they want to see proof. They don’t care about how much you say a particular marketing strategy impacted sales; they only care about it when they can see it in your financials. Viewing your financial story will make them feel more comfortable moving forward as what you verbally tell them, will match the story you show them with your records.
4. Increase Trust by Appearing More Organized
Psychological cues are all around us whether you realize it or not. We often judge a book by its cover as much as we may try not to. If this weren’t true, realtors wouldn’t stage homes with “fake” furniture before they put it on the market nor would we ascribe a higher value to an item if it is more expensive than another of the same kind. We get in our own heads, plain and simple, and so do prospective buyers.
PsychologyToday.com reports that within a consumer’s buying decision, an emotional response “has far greater influence on a consumer’s reported intent to buy a product than does the ad’s content – by a factor of 3-to-1”. While this may be cited for consumers buying a product, emotions play a strong role in acquisitions.
Clean financials are your staging furniture. They show buyers you are organized and it calms their concerns about whether or not you have managed the business well. Organized, clean records raise the perceived value of your business because they will allow buyers to feel more secure knowing you have everything in control.
When a seller is disorganized, forgets details and gives off the impression they do not know their own financials, it turns off buyers. When buyers see this, they will immediately discount this business as a viable acquisition.
5. Minimize The Appearance of Risk
Minimizing risk for potential buyers is vital to a successful, seamless acquisition. And the more buyers understand about your business, the less apprehensive they will feel about potential future risk.
It’s difficult, if not impossible for buyers to understand and digest the history of your business in a couple of phone calls, especially if the business has been around for several years or more. And they need to understand it fully to calm their apprehensions about it being a high-risk venture.
Clean, organized financials allow buyers to dive deep into the story of your business and do it quickly. I had a recent buyer reviewing the financials of a business he wanted to purchase. In the seller’s financials, he listed the advertising and the marketing expenses as separate, even though advertising is a component of marketing. This lack of proper categorization delayed the acquisition and made it difficult to understand exactly what the seller had done. When misunderstandings arise, it makes the acquisition feel more risky.
Make it as easy as possible for buyers to understand your business and its history. Organize your financials into categories and keep everything documented clearly.
Clean Financials Increase Business Value
As a seller, it is your job to convince a potential buyer that your business is worth buying. This is not possible without clean, well-organized financial records that tell the complete story of your business’s past present and potential future.
Do you have any questions about keeping clean financials? Any tips for how you record your financials? Please share in the comments below.
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