A BizBen Blog reader emailed me a question today on the topic of books and records when selling/buying a business, they ask:
I have found a business that has great books and records, but the listing price is quite high compared to other similar businesses on the market. Is this normal?
I will let BizBen Blog Contributor - Joe Robertson of
Southern California Business Brokers - answer this question for our reader:
"
The answer is yes, it is normal to pay a higher price for a business with well organized books and records than one with poor financial records. There are many reasons for this, and I want to comment on the two main forces that drive the price of any product; supply and demand.
Supply
As a business broker, I have looked at hundreds of businesses for sale and have seen financial records in a wide variety of conditions ranging from the shoe box of receipts to compiled profit and loss statements and audited tax records. All of this first hand experience allows me to conclude that most small businesses do not have clean financial records because most small business owners simply do not take the time to be properly organized.
Demand
The many risks involved in purchasing a small business can seem daunting to any potential buyer. Good books and records lessen the risk because they provide a firm foundation for the evaluation of the past performance of the business, and they allow for an accurate determination of the value of the business. In addition, organized books and records allow for a more expeditious review, potentially shortening the buyer’s due diligence period, all of which are desirable. Increased desire equates to an increase in demand.
In summery, we have a high demand for a scarce product. The basic laws of a free market economy will come into play and push this price higher. Therefore you will almost always pay more for a business with clean books and records than a similar one with poorly organized financials.
I will leave you with one final note. I would advise any buyer to pay a higher price for a successful, well-organized business than to get a great deal on a poorly functioning or risky venture."
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