Tuesday, 20 December 2011

Does Your Business Have Inadequate Financial Records?

It’s probably safe to say, most people realize private businesses’ accounting records are kept to minimize taxes whereas public companies’ records tend to maximize earnings. 

This seems logical considering the average business owner would much rather pay as little as possible to Canada Revenue considering all the hard work they put into their business. This, on the surface, can seem problematic when you go to sell your business.

If tax records are the only ones you keep, your company is going to show minimum taxes and minimum earnings.  This makes for lower valuations, since Buyers will determine what they are comfortable paying for your business based on those earnings.

What is the solution?

The answer isn’t to pay more taxes, but rather to keep records so that they can be recast to show the business’ actual cash flow.

Unusual expenses, such as your teenage daughter’s cell phone, the antiquities you had shipped from South America for your home den or your spouse going to a convention as an assistant, should not be mixed in the advertising and promotion account.   Such expenses should be kept in separate accounts or religiously logged to allow future recasting. 

When should you start doing this?

Yesterday!  This should be done even if you are not contemplating selling now.  Buyers will typically want to recast for a minimum of the previous 3 years and many times for up to 5 years.

Are you positive that your business will not be transferred in the next 5 years?

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 
William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.


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