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How Clean Financials Can Improve the Value of Your Online Business
By Quiet Light
There is a lot more to your business than just its financial records and performance, and buyers want to know about your entire online business before investing in its acquisition. They’ll ask: “Does this business excite me?” “How easy will it be for me to run it?” “Can I grow it?”
But before any buyer will invest in your business, they will want to confirm that it makes financial sense to invest. Whether or not an acquisition makes financial sense is an undercurrent to any and every acquisition.
This requires a detailed review of your financial records, which means you will need clean financials in every respect.
When Your Financials Are a Mess
If your financial statements are a mess, a buyer can’t confirm if acquiring your business makes financial sense. Even if that buyer loves every other aspect of your business, if it doesn’t make sense financially, they won’t pull the trigger on the acquisition.
As a result, if your financials are a mess, most buyers will simply walk away. For those who don’t walk away, they will likely make a lower offer in order to compensate for what they can’t learn from your financials.
But keeping clean financials goes beyond simply confirming whether your business makes financial sense. Clean, detailed, and verifiable financials does two more things: 1) they tell a story, and 2) they have a psychological impact that extends beyond what the numbers say.
Your Financials Are a Story
I am constantly amazed by how much a scientist can learn by something as simple as the rings of a tree. Using tree ring data, they can tell what years had droughts or massive rainfalls, and what years had forest fires. Scientists even use tree ring data to establish historical temperature data.
You see, a tree’s growth is directly impacted by its surrounding environment, and this gets inscribed in their growth patterns. The rings become a permanent recording of the tree’s environment throughout history which shows its survival through drought, it’s flourishing through rainy, warm seasons, and it’s survival through fires.
Your Financials Are Like Tree Rings
Your financials are like the rings of a tree. The decisions you make, the condition of the economy, and the overall direction of your industry – all of this impacts your business. And your business inscribes these things into your financials.
This becomes really important when you sell your business. As you tell the story of your business to potential buyers, they will see the story played out – and confirmed – in your financials. Financials make your business’s story more real, tangible, and believable.
Potential buyers don’t just hear you talk about the marketing investment you made last year, they see how that impacted sales. They don’t just take your word about an improvement in your conversion rate – this is baked directly into your financials. Like the rings on a tree, they can point back to your business’s history and match it up with what you tell them. And this creates a compelling story.
If your financials are clean and well organized, they tell a clear and understandable story. On the other hand, messy financials tell a messy and confusing story. Buyer’s won’t acquire a business that they don’t understand.
The Psychological Impact Of Clean Financials
There is also a strong psychological benefit of clean financials which actually increases the perceived value of your business.
Clean, detailed, and verifiable financials helps a buyer trust that you have managed the business well. They make you look well organized and prepared. It helps a buyer know that they are hearing the whole story of your business, and prevents them from wondering what they could be missing that will hurt them at a later time.
Image Is Important
The idea that your image is important isn’t a new principle – we see it in action in many different ways: houses with great curb appeal sell faster and for more money; attorneys with higher hourly rates are perceived as being better at their trade; businessmen who dress well close more deals.
There are a lot of psychological cues that a potential buyer uses (whether they know it or not) which helps them decide if they should buy a business. Clean, detailed, and verifiable financials is a strong psychological cue that your business is a high quality business.
What Are ‘Clean’ Financials?
If clean financials are really so important that they can increase the value of your business, what makes financials ‘clean’?
There are three qualities that you should focus on: separated, detailed, and verifiable.
Separated financials means showing only the activities of your business and not mixing that with other businesses or personal activities.
We have seen some very impressive businesses that were unsellable because they basically ran a slush fund with their business, mixing personal and other businesses together. Keep things separated.
Remember how I said that your financials tell a story? Well how easy would it be to understand a story in which all the characters were named “Bob”? It would be pretty confusing, wouldn’t it?
The same holds true for your business.If you generate revenues through sales and affiliate income, separate these out into different categories. If your marketing consists mainly of PPC and a smattering of other types of marketing, make note of how much is being spent on each.
This isn’t just good advice for maximizing the value of your business; it will help you be a better business owner as well! There is a lot of good information in your financial reports.
Being verifiable simply means that you can back up your financial statements with third party statements from your bank or elsewhere. It means that your buyer doesn’t just have to “take your word for it”, they can see the financials echoed in the statements of other, neutral institutions.
Clean Financials Increases Your Value
It can be counter-intuitive to many business owners that keeping clean financials would increase the value of your business. After all, clean financials don’t change the substance of the business, just how the business is being recorded.
But trying to convince a buyer to invest heavily in your business requires that you effectively communicate the benefits of your business. And since no buyer will acquire a business that doesn’t make financial sense, being able to clearly communicate your finances is paramount.
What about you? Do you find keeping clean financials difficult? Do you have tips on how to keep clean financials easily?