Murphy’s Law is an adage that says Anything that can go wrong, will go wrong. Murphy is bound to strike at some point, however, the following common mistakes that can be avoided.
Comparing Sales Prices
Don’t compare what another business sold for to your business. There are just too many variables and too many unknowns. While the overall market certainly has some relevance, the sales price for your business should be based on the value of your business.
The price for a business is the highest justifiable price a buyer will pay for it. Some brokers will list a business at any price the seller wants, even knowing the price is too high. But an overpriced business that sits on the market too long can become tarnished. By overpricing a business, a seller could lose good prospects.
Incomplete or inaccurate records can negatively impact the sale price, cause a bank to reject a loan, and even prevent a sale. Good records are essential. If a proper paper trail for revenue and expenses cannot be documented, it is unlikely the seller will receive his asking price. Bad records is a big cause of deals that fail.
Proving owner perks
Much can be said about owner perks in evaluating a firm’s cash flow. The IRS has specific guidelines as to what is legally allowed in tax computation and some business owners walk a fine line in the area of perks. Problems arise when a paper trail is lost or impossible to reconstruct.
A complete paper trail eliminates a sense of uncertainty when a buyer is in the due diligence stage. If receipts and general ledgers and the connection to the corresponding line item on the P&L statement cannot be traced, a perk should not be included in the cash flow
Many owners play with costs to reduce their tax liability with no thought to the effect of the adjustments on the business performance related to cash flow. Another target area is the Cost of Goods section. Many items, including owner’s compensation, can end up in the cost of goods sold.
The problem is the resulting picture given to buyers. Often the owners can’t remember what they did so they can’t explain it. This creates due diligence headaches. The business may be fine, but a year-end adjustment can skew figures and create a hazy picture that is difficult to explain.
Take whatever steps you need to now to make sure you don’t face any of these Murphy’s Law problems when it’s time to sell your business.