Why keeping records helps you sell your business
Business owners fail to sell their business by not taking critical steps, a survey has found. And if they do manage to find a buyer, it may not achieve its full value, the report claims.
The findings of the survey of business owners by the Exit Planning Institute (EPI) were reported in Forbes magazine. According to the study, entrepreneurs are missing out on successfully selling their business because they simply haven’t got their house in order.
The result, says EPI CEO Christopher Snider, is that two-thirds of business owners are ‘woefully unprepared’ in a number of key areas.
One of the areas in which they fail to prepare is having essential records in place. In fact, HMRC has revealed that at least 39% of businesses visited by inspectors had issues with record keeping.
Many business records need keeping for legal reasons, but even those are not always in place according to HMRC.
Keeping accurate business and finance records helps keep its value at its highest because you can prove the company’s worth. Without proper records, potential buyers may worry about what you aren’t telling them or that you may just be making up numbers. Having no records can seem suspicious for hopeful suitors.
Why you need to keep business records
When buyers look to purchase a business there are three things they generally consider: profitability, sustainability and value.
Increasing sales and while limiting expenses is fundamental in profitability but there are other ways to increase cash flow. For example, keeping accurate records is one. Accounting software today helps you keep records in real-time and helps ensure you’re paying for suppliers or contractors only when you need to.
As a result, your business is more profitable but you’re also accurately keeping records so that any potential buyer can see its true worth.
You can have a profitable business that is sustainable but if you cannot prove its value it makes it almost impossible to sell.
What business records do I need?
We’ve put together a list of some of the documents commonly requested by buyers. Don’t worry if this list looks scary and unachievable. It’s not as difficult as it may first appear. Use the contact form below if you need assistance and we can advise.
- Management Accounts: If you are not doing so already you, use an up-to-date online management system, such as Xero or Quickbooks. And then make sure you know how to access and produce the relevant reports from the system yourself (As your broker, we will need to see P&L, Balance Sheet, Aged Debtors and Aged Creditors reports on a monthly basis). This may sound obvious, but for a buyer an inability to access these reports quickly will raise doubts in their minds about the profitability and value of your business.
- Pertinent data: Even with computerised accounts, buyers like to see that management have a clear understanding of the business:
- the profit centres;
- how each line/product is performing;
- breakdown of sales by salesperson, by customer, by sales office / county ;
- performance of online vs offline and cost of acquisition of customers in both locations
...you get the picture.
These questions are likely to arise during due diligence, so if you don’t already have that data it’s worth preparing them in advance rather than on demand. The more you can demonstrate that you’ve got a keen pulse on the business, the better.
- Annual Accounts going back at least three years, ideally with Balance Sheet and P&L statements showing a healthy profit and growth. If yours is a “Lifestyle” business and all profits are not easily discernible from the statements, it’s worth starting to make the transition now and planning your exit for a little later… or getting help to recreate your accounts for an investor’s purpose rather than the tax man’s. Contact us to find out how.
- Planning and cash management: A written business plan, complete with growth strategies and targets and business risk analyses; cash flow projections; working capital analysis etc., all make for a very good impression and, for some buyers, form compulsory viewing.
- Accounts Receivable and Payable: Are customers given too much time? Is collection of debts efficient; are the aging reports properly followed up and acted on? Are maximum discounts and facilities being used with suppliers? Do you regularly review prices and compare across suppliers? And do you have records proving all this?
- Legal, environmental and tax documents: Copies of all company, legal, environmental and tax documents are essential. These include original company registration papers, company secretary records of director meetings, changes in shareholding etc. (for registered companies); contracts with suppliers, service providers, bank/s, customers, landlord/s, employees; valid Energy Performance Certificate ; VAT returns, PAYE and other HMRC related records etc.
- Operating Documents: The only information that’s important in some hierarchies is who knows what. Investors prefer to not rely on staff memories. They want to see what information and knowledge has been recorded. Proper manuals on operational procedures, quality control, health and safety, routes to new customer acquisition, schedules for facility and equipment checks, for example, say a lot about how your company is run as do records on employee recruitment, training and retention.
Do I need all these documents?
Not all of the above documentation is required in every case. But failing to keep them can make selling your business more difficult. As we have already suggested, keeping records really does add value whether you’re planning on selling your business in the next few weeks or years ahead.
Hornblower Business Brokers can advise you on the documentation you need to sell your specific business. Please use the contact form below to get in touch.
Bio: The article was contributed to by Clinton Lee, founder of UKBB.
If you are considering selling your business or acquiring a business, you may like to brush up on the terms and acronyms you will hear. Read our Glossary of Terms.