The Link Between Accounting and Accurate Business Valuation

“Price is what you pay. Value is what you get.” 

– Warren Buffett (Chairperson of Berkshire Hathaway)

It is believed that entrepreneurs can earn huge profits by selling their businesses, and I can confirm this with my recent transaction. After contemplating and weighing different scenarios, I decided to sell my company. 

Do you know, that only 30-40% of businesses listed for sales actually ever get sold? (Nexus: Business Valuation) Well, the major reason for this is said to be the inaccurate or too high business valuation. 

Now, some of you might be wondering how I valued my business accurately and earned huge profits through it. The simplest answer is ‘effective accounting’. Curious to know more? Read on and discover more as I tell you about all the accounting aspects that helped me put the right and profitable price on my business.  

Find Professional Support

There were numerous things that needed to be considered to put the right price on my business, and at a certain point, all this felt like a complex web, where I was only getting more tangled with each step. That is why I shifted to a professional route and hired an expert to assist me make better and more informed decisions. 

Their expertise in business valuation multiples by industry made it easier for me to compare companies within the same industry. 

Not only that, but they were also well-equipped with the knowledge of various valuation drives which highly influence the price to put on a company, helping me find more reasonable valuations and simplify complex financial operations. 

Determining Financial Health

Prospective buyers often pay immense attention to the financial health of a company, after all, it can tell potential buyers a lot about it, including its ability to generate profits, manage its receivables, and ensure long-term growth, reflecting the financial strength and viability of a company. 

To maintain transparency with potential clients, our teams implemented the following steps to assess the crucial financial factors. 

• Analyzing our balance sheets and income statements. 
• Calculating financial ratios. 
• Conducting cash flow tests. 
• Looking out for any deteriorating signs like debts, margins, and liquidity. 

Historical Performance Analysis

The historical performance of businesses is one of the most significant factors for potential buyers to consider, as it gives them an idea of how a company has performed, adapted to changes, and overcame challenges in the past. 

I organized my company to look as attractive as possible without altering anything, and provided my clients with all the documents and records they needed for this evaluation. This not only helped me sell my business for a better price but also gave them fair insights into the business performance. 

Asset Valuation

For those of you who are not aware, asset valuation is the process of determining the value of all the assets the company possesses at the moment.  

It does not take a genius to guess that when you sell a company, all of its assets and liabilities follow in line. Hence, it is necessary to show your buyer everything your company owns and put a price on that too. 

I did not want any losses from undervaluation, which is why I paid special attention to this step, and the experts I hired did an exceptional job performing asset valuation. 

DO YOU KNOW?
A business can have multiple values at a single point in time, since it is determined by the hypothetical price a ready buyer is willing to pay. 

Compliance and Risk

There are various doubts that might occur in the prospect’s mind, and rightly so, all these doubts need to be resolved before any deal is finalized. No one would want to purchase a company that hasn’t been compliant in the past and be held responsible for the previous owner’s mistakes if the topic is brought up in the future. 

To minimize their worries, I provided them with valid proof of compliance with all the IRS rules and regulations. This helped them gain more confidence in my business and also demonstrated that no hidden risks were associated with it, encouraging them to finalize the deal and pay higher prices for my company. 

Future Costs and Expenses

It is obvious that buyers consider and put great thought into how the future might look for a business. This is especially important for buyers who consider companies just an investment and not their passion. 

The accounting experts at my firm created detailed documents showing all my business expenses from past and present, to give them a fair idea of how much it might cost them to continue running the firm, also how much profit they can expect to earn in the future. 

These reports and documents I presented helped them ensure that my company is on the right track and is only likely to even perform better in the coming years. 

In the end, I can only say that no one wants to buy and get stuck with a disorganized and chaotic company. That is why you must keep your business’s accounts in good health if you are even thinking of selling it in the future. As I said above, getting a professional on board can provide significant help in organizing your business’s accounts, essential to finding the best deals out there. 

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