- Good Books and Records - Good Books and Records
This is similar to the location, location, location mantra when selling real estate. Of course, it does not tell the whole story but the very experienced people who come up with this are just trying to make an important point that can not be overlooked in almost every circumstance. One of the big reasons good books and records are so important is that businesses are generally valued based on their ability to generate cash flow for a Buyer in the future (see previous blogs for more details on this). We have previously said that business sales are 60% heart and 40% head for a Buyer but the head stuff matters. This is similar to buying a house, you and your partner need to love the house but then the finances have to work, the kid's schools have to be close enough, work needs to be a decent travel distance, etc. You will never be able to buy the house if the payments are double your salary and the commute to work is 3 hours each way for example. In a similar way, a Buyer needs to know that the cash flow produced by the business is going to be able to pay for any debt service, deferred payments to the Seller, enough for risk mitigation and still have enough left over for a Buyer to make a living if he needs to or enough of a return if he is an absentee Buyer. I am always amazed at how some Sellers gloss over this point and think a Buyer will 'get' their business and think that the excuse of not being 'very into accounts' will somehow make poor or old books and records ok with a Buyer. I can tell you from experience, it does not. If a Buyer does like the business and we proceed with due diligence, all that happens is that
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