Cautionary Tale #6: Accounting Woes

Accounting WoesWhenever we discuss commonalities in successful transactions, inevitably “clean books” will be one of the first three things mentioned. Numbers don’t just matter for your valuation, or for tax purposes, or just to track where the money has gone: without clean books, a buyer can’t know whether he/she is looking at a solid business.

Here are three examples of people who came to work with us who didn’t accept that basic premise:

Bad Books, Buyer Balks

We had a seller who was looking to sell a car wash, but had inconsistent and sloppy books. The buyer understood this and was willing to wait as the books got cleaned up. For some reason, the seller had been using a tax attorney to do the accounting. $20,000 and some months later, the seller had clean books and was square with the IRS. But in the process, the buyer had long since flown the coop because of the time lag and lack of responsiveness from the seller. To compound his woes, the previous accountant/attorney was suing him for non-payment of previous bills.

Don’t put yourself into this situation. Startup owners do it all the time by handing a shoe box of receipts to their new accountant/bookkeeper. Don’t do that. Start on the right foot from the start.

Full Disclosure Matters

In another situation similar to the one above, a seller was not as responsive as she could have been with her books, and the buyer started to get uncomfortable. At some point, it came out that there had been a $180,000 bad debt write-off from an old account. The situation was completely explainable as a one-time occurrence that shouldn’t affect the value of the business, but the seller had already been slow in responding. The buyer saw this disclosure as only the first in what might be more shocking disclosures, even though the reality was that this was the only real accounting issue to discuss.

The seller had created an atmosphere of concern and doubt, so it didn’t take much more to dissolve that confidence entirely. Always show and tell all the warts of your business to your broker. We’ve seen them all, and one thing we can say for sure; when you lead with honesty, you create and foster trust with your buyer.

Lying to the IRS

Another time we had a seller with a business that took in $2.2M in annual gross revenues, which led to $400,000 of declared owner benefit. But the owner also took $200,000 of unreported cash for himself, which was obviously not declared to the Internal Revenue Service. When we told him that he couldn’t get what he was asking for for the business since the books didn’t back the narrative, he insisted that we list the business anyway. “I’ll get audited if I go back and fix it now, anyway,” he said. While that has happened in certain circumstances, we told him that this wouldn’t be attractive to buyers.

Unsurprisingly, he got precisely zero offers, for the simple reason that potential buyers thought, “if he’s willing to lie to the IRS, which will run over your grandmother to collect what it’s owed, what else is he willing to lie about… to me?”

Honesty is the best policy. It is one of those lifelong bits of wisdom our mothers taught us long ago.

We all make mistakes – if you haven’t been straightforward with your books in the past, there very well may be ways to fix them and prepare your business for a successful sale.  Call us and let us connect you with people who can help you do precisely that.