Top 20 Destroyers of Business Value: # 6 Not Maintaining Good Records

Posted on August 24, 2012 · Posted in Blog

We just completed the valuation of a business that owned several franchise locations. Unfortunately, the owner ran two of the locations under one set of books and records. The owner now wants to value and sell one of the franchise locations. Since, there is no way to validate the revenues and expenses for the location on a standalone basis, this muddied the waters and we had to decrease our valuation.

This will also make it extremely difficult if a third party lender needs supporting documents such as tax returns. In our post financial crisis environment, lenders are required to support every loan with detailed supporting documentation.  This will also be ammunition for an acquirer to decrease the valuation of the business and make it more challenging to get through due diligence.

There are two lessons here. The first – as we have discussed in earlier posts – involves long-term strategy. If the vision and strategy was to diversify and build multiple locations that could be sold individually, then there should have been separate books, records and tax returns. The second is the point of this post. Not maintaining good records decreases value!

When it comes to outside investors and acquirers, every aspect of your business will be questioned, scrutinized and all the skeletons will come out of the closet. Run a clean tight ship, document all processes, keep all financial records up to date, close the books on a monthly or quarterly basis and lean on experts and your CPA  to keep you advised of all accounting, tax, legal and HR regulations.

Maintaining accurate and up to date records at all times is an investment that will be paid back many times over.  We’ll talk about what it takes to get through due diligence in a later post, but it’s not a fun process!  In the meantime are you decreasing the value of your business by not maintaining good records?

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