The Value of Good Financials – Don’t Cheat!

As a Business Broker, I often discuss the intrinsic value of good financials. You would be surprised how many businesses do not maintain good records; understate the reported income in tax returns; overstate expenses and hide (do not report) most of the cash generated by the business.

As a result, many sellers, when it comes time for Due Dilligence, cannot effectively sale their businesses because they cannot prove what the business REALLY generates in bottom line profitability.

In the Business Brokers’ world, “profitability” is called Owners Benefit, which is Net Income adjusted by depreciation, amortization, owners’ salaries, interest and benefits–such as automobile insurance, please visit:- health insurance, personal insurance, etc. And normally, businesses sell at a multiple of 2-3 times Owners Benefit.

This information is gathered through solid financial statements or tax returns. If the information is other than those found in financials, the buyers will look upon it as insufficient data for the evaluation of the business. Many businesses depend on the “Owners Estimate” as the basis for their pricing–not good enough.

So, if your financial records are in bad shape or your profits are understated, chances are that you will not get the value you wish when it comes time to sell your business.

Using taxes and/or financial records as a guideline for valuation, this means that your business will be undervalued significantly and you may have to sell it thousands of dollars below its real value.

So, if you and your business have an exit strategy–don’t cheat and keep good financials. It will add significantly greater value to your bottom line than the few dollars you may save on taxes. Fruit for thought.

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