Where the Buck Stops

Where the Buck Stops

Where the Buck Stops

Whether buying or selling a business of any kind, the most important matter that takes precedence over all else, is the financial data.  Yes, physical presentation and everything else play a role, but the first consideration is always, how the financial data looks.  Historical data is what first comes to mind and many love to look at it on a “trending” basis.

Considering that we are discussing buying a business, emotion generally plays little to no role, as opposed to buying a house, where it is more about buying a “home” (not a house).  A place for a family to live, grow, and be secure, and so on.

Sure, the physical presentation of a motel is important, the size of the residence, and location, but the buck stops with the financial status of any business when determining a value.  Financial data that legitimately confirms the income, gross profit, expenses and profitability performance of any business.  Without this in an acceptable format, there is no reason to worry about anything else.  “XYZ Motel is the best performing motel in town, the carpark is always full” commented a long term local resident.  This may be the case, but if the financial data cannot confirm it, then is it really the best, or even worth the value it should be in the market?  Perception is reality, until the financial data comes under the microscope.

The presentation of financial data is really two fold.  Firstly, how do the numbers physically present?  Not what the numbers are, but how they are presented on hard or soft copy.  Do the totals add up?  It seems impossible but I have seen many addition errors over the years.  The total expense amount is less than what the individual expenses total, thereby inflating the profit.  Are the Seller’s Accountant’s supporting documents also attached to the profit and loss statements?  Is the spelling of each entry correct?  I have the same issue with spelling mistakes on a profit and loss statement as I do with an email.  If I see an email and there are spelling mistakes in the subject line or text, I immediately think the email is spam and discredit it.  The same goes for financial statements.  I start to wonder who prepared this profit and loss statement, surely it was not the Seller’s Accountant.  Again, I start to question the validity of the statements, and the credibility of who prepared them.

Secondly, is the all important actual dollar amounts.  The income & net profit must be as high as they can to achieve the highest possible sale value in the market.  Therefore, I always suggest every Seller has their Accountant prepare an Abridged Profit and Loss Statement for the business.  This will present the profit of the business as it should for sale purposes, not for taxation purposes.  It will have removed all income and expense items that are particular to the current owner, and not a part of the business.  By example, an owner choosing to pay themselves a wage of $80,000 per annum, compared to another paying themselves $8,000 per annum, has nothing to do with the business, this is generally a taxation based decision.

Profit and Loss Statements are generally prepared for Taxation Return purposes and to that end, include expenses and tax deductions which inevitably present the lowest profit possible, or preferably a loss depending on each parties individual tax position.  Adjustments will then be completed so the Abridged Profit and Loss Statement can be utilised for sale, refinancing or other purposes.  If not, a true representation of the profitability of the motel business compared to other motel businesses would not be possible.  Conversely it is also important to make sure that no legitimate operational income and expenses of the business have been removed.  Even the most basic due diligence of the financial statements will determine this.  The best result from this would be that the end sale price of the business will be affected negatively if the profit has been overstated.  The worst is that the sale transaction will be terminated altogether.  A waste of everyone’s time and money.

Aside from the Profit and Loss Statements being required by a potential buyer, other financial data will be requested.  Providing monthly income statistic reports that include GST, will not match the Profit and Loss Statement.  As long as the consistency of the difference of the GST is there, the issue can be cleared up quickly however if this is not the case, this will create questions about the accuracy and legitimacy of the data.  If there are anomalies for a particular reason, be upfront and explain why this is the case.  Never try to sweep it under the carpet and hope that the issue goes away.

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