Good Books Build Valuable Businesses

One of the most important disciplines in building a successful business — and ultimately preparing that business for sale — is maintaining accurate and consistent financial records.

Keeping good books should not be viewed simply as an accounting requirement or something that gets done at the end of the year for tax purposes. It should be part of the daily and monthly discipline of running the company. Accurate financial statements create a historical record of where the business has been, how it has performed, and how management decisions have affected its growth.

Historical financial performance does not guarantee what a company will do in the future. However, it provides one of the strongest foundations for understanding what the future could look like under reasonable assumptions.

A Buyer Wants the Numbers Behind the Story

A prospective buyer wants more than a successful story. They want to see the numbers behind that story.

Good financial records allow a buyer to understand where revenue came from, how the customer base developed, what the company spent on advertising and marketing, how efficiently the business operated, what it cost to produce that revenue, and ultimately how much profit the company generated.

Those numbers also tell the story of the decisions you made along the way. Your advertising expenditures show what you invested to attract customers. Your operating expenses demonstrate what it took to run the organization. Your revenue records show how customers responded to the company’s services. Your profit demonstrates what remained after the work was completed and the bills were paid.

Together, those records become the financial history of the business.

Confidence Is Worth Money

When the time comes to sell, that history becomes extremely important. A sophisticated buyer is going to perform due diligence. They will want to understand not only what the company earns today, but how consistently it has performed over several years.

Clean, organized financial statements give a prospective buyer confidence.

Confidence matters because uncertainty creates risk — and buyers discount businesses when they perceive risk.

If a buyer cannot clearly determine where revenue came from, what expenses were necessary, or whether the reported profitability can be verified, they have to make assumptions. Those assumptions will rarely favor the seller.

On the other hand, when several years of reliable financial information clearly demonstrate the company’s performance, the buyer has something tangible upon which to base a valuation and an offer.

Start Years Before You Sell

This is why preparing to sell a business should begin years before the business is actually placed on the market.

Every month that you properly close your books, reconcile your accounts, categorize your expenses, document your revenue, and review your financial statements, you are doing more than practicing good accounting.

You are building evidence of value.

Someday, a prospective buyer may be sitting across the table deciding what your life’s work is worth. The better you can document the history of the business, the easier it becomes for that buyer to understand what you built — and to have confidence in paying you a strong price for the years of work, sacrifice, risk, and effort that went into building it.