The Importance of Good Financial Records for Acquisitions
TV shows like ABC’s Shark Tank and CNBC’s The Profit dramatize business acquisitions. Every week, small businesses and entrepreneurs receive investments from millionaire and billionaire investors. In exchange, the investors get partial (sometimes full) ownership of the business and occasionally, residuals off each sale.
Between the two shows, American audiences get a glimpse into the types of questions investors ask potential investments. Many zany ideas are pitched on Shark Tank, from Tycoon Real Estate to Cougar Energy, but the sharks typically pick these pitches apart when reviewing the numbers on paper.
Meanwhile, Camping World CEO Marcus Lemonis walks viewers through the full acquisition process on his show. Some companies form long-lasting, sustainable relationships with him, while others lament over negotiating a deal. The Profit often features businesses like Popcorn Planet, where deals fall apart after performing due diligence on the company.
Both shows highlight the importance of clean, accurate financial records during a business acquisition. Even Amazon-based businesses need these records if they ever hope to execute on their exit strategy.
Business Acquisitions Fall Apart During Due Diligence
Most business negotiations and deals are made in good faith. Financial statements and other paperwork are reviewed to find key information, including customer acquisition costs (CAC), profit margins, and net revenues. This information gives the potential investor an idea of the financial health and stability of a business.
Asking for these numbers upfront gives a good overall view of how well the business operates. An entrepreneur who can’t provide gross profits or CAC doesn’t have a great grasp on the business. Lemonis repeats a mantra that he invests in businesses based on the people, processes, and products.
Solid business processes include accounting for financial information. This helps you understand liquidity, better curb spending, and start gaining a return on investments in the business. It’s also how you track business assets.
Benefits of Good Financial Records
Maintaining good financial records isn’t just a good idea. The U.S. Internal Revenue Service (IRS) practically mandates it. The agency explains that income and balance sheets are necessary to identify income sources, keep track of deductible expenses, track assets, and prepare tax returns. In fact, keeping track of financial records offers a plethora of benefits.
1. Protect the Business from Audits
Financial records protect businesses legally. Any business owner needs to be able to prove the revenue or losses, along with receipts for each transaction. Businesses that fail to do this can end up in dicey legal water.
The IRS can audit a business for up to six years after filing, so it’s a good idea to maintain records for at least that long. A decade is recommended to ensure maximum protection, and it’s a good idea to have a professional accountant on staff full-time to track this information throughout the year.
2. Identify New Revenue Opportunities
When financial records are kept, it’s easy to perform analysis on the business to determine which revenue streams are working and which aren’t. Business owners can compare financial records to industry and local market averages to find new revenue opportunities for the business.
3. Forecast and Manage Expenses
Maintaining accurate records in real-time helps exponentially over time. After a year, it’s possible to compare historical performance daily, weekly, monthly, and annually. This shows the progress of the business and helps properly manage expenses. Understanding that business will pick up during the holidays based on last year, employee scheduling and resource management can be adjusted accordingly.
4. Increase Acquisition Likelihood and Price
Business owners with great financial paperwork are more likely to get an investment. Shark Tank and The Profit shows this season after season. When they do get an investment, the numbers and paperwork also give them negotiating power. Organized financial records show an organized business that investors are excited to acquire.
Of course, not just any financial records will do. There are indicators that investors look for before acquiring a business.
The Ultimate Business Acquisitions Due Diligence Checklist
Legal research company LexisNexis provides an in-depth business acquisition checklist. It details the specific documentation to collect for due diligence. This includes,
1. Basic Corporate Documents
Investors like to see the company’s Articles of Incorporation, by-laws, and any other information regarding the organizational structure of the company. This includes any company share distributions, meeting minutes for committees, and any other related documentation.
2. Securities Issuance and Shareholder Info
All debts, equity, and stock options should also be listed out. This ultimately determines the value of a business. Major shareholders will be contacted for references during the acquisitions process.
3. Material Contacts
While it’s nice to have an overhead view of the company, it all inevitably needs to be verified during the due diligence process. This means any loan agreements, real estate contracts, credit agreements, and vendor/client contracts need to be provided.
4. Patents and Trademarks
Patents and trademarks are valuable assets, and investors like Kevin O’Leary won’t buy a company without patents. Including any completed patents and trademarks can greatly increase the likelihood of selling a business.
5. Tangible Property and Employees
All business equipment and resources are assets with value that can either generate revenue or be liquidated. Employees are necessary to keep a business running post-acquisition. A detailed list of all resources (hardware, software, and human) is essential for businesses looking to sell.
Selling a business can be complicated, but SellerVue makes it easier. Contact one of our professional consultants to learn how we can increase your profitability, build financial records, and prepare your business for acquisition today.