On July 16, 2014, CFO Magazine (ww2.cfo.com) published an excerpt from “The Exit Strategy Handbook: The Best Guide for Selling Your Business” published by B2B CFO. The excerpt comes from Chapter 19, which discusses the importance to a business owner of having accurate financial information before the company is sold. The article starts out with the following paragraph:
A seller’s business acumen will be judged severely by a prospective buyer. Having bad internal financial information and error-riddled financial statements is the fastest method you can use to chase away a good prospective buyer. The buyer will expect information to be accurate and in accordance with generally accepted accounting principles (GAAP). The buyer will expect monthly records to be closed on a timely basis, by around the tenth to fifteenth day of the following month. Everything the seller does is either enhanced or made suspect by the timeliness and accuracy of the company’s internal financial information.
The article goes on to discuss many areas of financial information which can be subject to scrutiny by a prospective buyer, including balance sheet errors, revenue recognition and projections. While all three of these can be problem areas, in my experience the balance sheet is perhaps the area where errors creep in. The article points out the following common sources of balance sheet errors:
- Cash that has not been reconciled correctly;
- Inventory, such as obsolete items;
- Accounts receivable that should be written off to bad-debt expense;
- Recording depreciation on the tax basis instead of the GAAP basis;
- Expensing prepaid items instead of capitalizing them;
- Accounts payable amounts either unrecorded or recorded in the wrong period;
- Errors in accruals, such as accrued payroll;
- Long-term debt that does not agree with loan amortization tables; and
- Errors in owner’s equity.
In my career, I have run into all of these errors. Some are easier to correct than others. If you are considering selling your business, any of these errors can cost you money.
The entire text of the article can be found at http://ww2.cfo.com/ma/2014/07/prepping-financials-sale/.