Difficulties in Pricing Businesses

One of the major problems in pricing businesses, especially small ones, is the record-keeping of the owner. Most owners are “chief cook and bottle-washer.” Maintaining the financial records is not necessarily high on his or her list. In many cases, the bills and receipts are tossed in an envelope and periodically dumped on a bookkeeper’s or accountant’s desk. From these documents, along with computer (or cash register) print-outs of sales, the accountant prepares tax returns, and, in some cases, monthly or quarterly income statements. The rub in all this is that the accountant can work with only what the seller provides. Small business owners are usually so busy running the day-to-day operations that they fail to spend the necessary time on the financial affairs of their business.

The sale of a business is usually “event driven.” In other words, there is generally a specific event that forces, or, at least, pushes an owner into selling. Very few business owners actually sit down to consider selling and all that it entails. The event occurs; the seller calls his local business broker and announces that he or she now needs to sell. They want to know what it will sell for. The business broker says that before a price can be suggested, he or she will need to see the financial records. The seller scurries to his accountant and says that he needs his current profit and loss statements and the last three years’ tax returns. The accountant promptly faints! When she wakes up, she tells the client that it will take a lot of time to go through the bag of receipts and bills.

When the financials are finally prepared or the tax returns given to the business broker, one thing is readily seen – the financial records or tax returns reveal that the business has not made much money over the years. After all, tax returns are not prepared to show a business in its best light. Nobody, including the small business owner, wants to pay any more taxes than he or she has to. The focus shifts now that the decision to sell has been made.

Business brokers are very good at recasting or normalizing the financial statements or tax returns. They add back such items as depreciation, owner benefits, etc., and arrive at the “real cash flow” of the business. This number is used to arrive at a recommended or suggested selling price. For anyone selling a business, using the services of a business broker professional can make the difference between a successful sale and “giving away the store.”