You Can't Make A Silk Purse Out Of A Sow's Ear

Every buyer of every business wants to see a set of immaculate financials of the business they intend to purchase. The ideal scenario is to have a minimum of 3 years accountant’s figures, which would include the Profit & Loss, Balance Sheets and BAS for the previous 5 quarters. So often, when we start the process of selling a business, the business owner has their financials in a mess. And by a “mess” we mean that the figures often have associated businesses included in the figures, expenses that don’t relate to the business, and income derived from outside sources. We always encourage business sellers to have their financials checked over by their accountant, with the express purpose being that the figures have to be “squeaky clean” and only relate to the business being sold. Buyers of businesses are always sceptical and will be looking for any warning signs of anomalies in figures. If they suspect that something untoward is happening in the financials, they lose interest and fast.

Having the seller put the financials in order will involve an expense from his accountant, but it is money well spent. When the business sale goes to contract, the buyer’s accountant will be required to do a thorough ‘Due Diligence’ on the business. A Due Diligence is similar to a tax office audit. If there are any skeletons in the cupboard, the accountant will sniff them out. Accountants are a rare breed of human being – they have an acute “sense of smell” for rats; if it smells like a rat, it usually is a rat and accountants will find the rat, if it is in the financials. Occasionally a business sale contract ends in termination because the financials aren’t in order. Part of the financials is the Balance Sheet, which can and often does confuse most people who aren’t accountants. A Balance Sheet is best described as a “snapshot” of the assets and liabilities of a business on a specific date which is usually the end of the financial year, 30 June. It shows the net equity of the business but can hide some details that that will ring alarms bells for a buyer. If the owner is propping-up a failing business, they may be depositing cash into the business which will show-up as an increase in the proprietor’s loan to the business. Many books have been written on ways to fudge a balance sheet and only the experienced accountant should interpret them. Mere mortals are not well qualified to understand a balance sheet, and that includes most buyers! Often wrong conclusions are made, which can cause a buyer to dismiss a business unreasonably.