Improving Financials and Record Keeping
In the past, we discussed how diversification can assist in increasing value to your business. To continue, another top driver of maximizing business value is having “clean” books and records to improve your financials and record keeping.
Remember buyers are investors, this being said, they analyze the risk, current revenue, and projected future cash flow of the business in determining if the acquisition is right for them. In addition, it is important to understand buyers analyze the multiples of discretionary earnings, EBITDA, and revenue they are willing to invest. Investors love to see annual EBITDA and revenue growth rates at around 15% per year. In just a handful of years, a company can double its revenue at this rate. They not only want to minimize risk, cover the debt service of their loan, pay a suitable salary, see growth opportunities, but they want to see a return on their investment. The higher the risk an individual takes, it is only fair to earn a higher ROI, and in order to achieve a higher ROI, a seller would need to settle for a lower multiple.
Following GAAP or ‘Generally Accepted Accounting Principals’ when performing your bookkeeping in your business it is strongly advised for investors to trust your financial statements. Likewise, structuring your financial statement, consistently the same way year to year makes it easy for buyers to understand the historical and financial performance trends of your business. Your tax returns should closely resemble your income statement, and any adjustments to the books by the seller should be able to be clearly explained to a buyer.
Lastly, I want to address running personal expenses through the business. For example, every $0.25 out of a dollar you save in taxes, you lose about $3.00 in valuation for not showing the true earning power of the business, running your personal expenses through it. I can’t tell you how many times I see this, and most lenders will not accept these expenses as add backs when recasting the financials to normalize the business’s past and projected earnings. Bottom line, having clean books and records will pay off in the long run!
Check out our correlating video —> https://www.youtube.com/watch?v=ABzGY-uufbA&t=1s