Solid accounting adds business value

December 1, 2003 By    

It’s true. As one who spends my time analyzing businesses, I can say without question that a business that produces high-quality financial statements that have integrity and show the true financial performance of the company will bring more money in a sale than an identical business with sloppy reporting.

You might think this is nonsense. You might also argue that – with or without accountants – your business has the same number of customers, sells the same number of gallons producing the same amount of gross profit with the same operating expenses.

Your argument is that the fundamental business is the same with or without good financial accounting records. While you would be correct in the above statement, you would be dead wrong in assuming that a buyer would see it the same way. Let me try to explain.

First, keep in mind that the eyes of the buyer, not the seller, determine value. While your argument that the true value of the business lies in the form of hundreds or thousands of your tanks, it is virtually impossible for the buyer to see them all. If he could, he would not glean the data he needs by visiting each one.

It is the financial performance of your tanks that the buyer is interested in acquiring.

Buyers see value in the certainty of what they are getting. Weak financial statements with poor credibility force the buyer to insist on a lower price for the uncertainty that is present. The higher the quality of the data means higher confidence in a buyer, which in turn produces a higher price.

Now that we have established the importance of good financial record keeping, let’s talk about what your business needs.

It all starts with basic, systematic accounting for the operational performance of your business. If you haven’t already done so, add an accounting professional to your team on either a full-time or part-time basis, depending on the size of your business. Interview several and choose the one with whom you are the most comfortable.

Once your internal accounting procedures are established, having an external accounting firm periodically review your financial statements and internal systems will enhance the value of your business even further. In some cases, the external professional must be a certified public accountant. A CPA can produce for you one of the following types of external financial reports:

External Financial Reporting – This is the simplest report and does not require a CPA. An accountant or other preparer will simply take your data and put it into a financial format that accounting professionals frequently use.

A compilation will not involve any in-depth analysis of your records, and the accounting professional doing the work will not guarantee the accuracy of the data in the report. However, this report does provide value to a buyer because it begins to validate and verify your company’s internal statements.

Financial Compilation– This higher-level report must be prepared by a CPA. It has particular value to a seller because the CPA will have conducted some form of examination of your internal records and will give very general comments on the findings in the form of notes attached to the published report. The CPA will not certify the data to be accurate, but he or she will have completed a more in-depth assessment of your business and will then provide a validation of your internal records.

Financial Review – This is the most elaborate and expensive type of external report. In preparing this report, the CPA will conduct a thorough inspection of your accounting records. In the end, the CPA will certify the accuracy of the data that is in the report, along with the adequacy of your company’s internal systems and controls. Buyers place the greatest value on a business that is supported by an audited financial statement because it reinforces the credibility of that business.

While this may sound like a sales pitch for you to throw money to the accounting profession, it is not. I can tell you that without any externally prepared financial statements, the accuracy of the data you share with the buyer will be in question.

Which of these reports should you consider? That is for you and your CPA to answer. Just get started, and the value of your business in the eyes of prospective buyers will increase.

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