Many feel that once an entrepreneur has gotten a business up and going, they are bored by operating the business and ready to move on to their next startup challenge. In fact, the proof of the entrepreneur's mettle is in demonstrating that the plan for the business was sound, and that the strategy was executable.
This often requires that they stay with a business for several years to prove the concept, before selling or going public, and possibly bringing in longer-term professional management. In any case, the quality of the records kept by a business can be a significant factor in taking the business to such a “liquidity event, " that is valuing the business in a way to convert equity to cash. Some generally accepted principles for this record keeping include:
Most businesses will have at least two basic financial statements prepared at the end of the annual accounting period-a statement of income and a balance sheet. There may also be other statements containing important information. These might include a reconciliation of retained earnings in the business, a statement of source and application of funds, and listings of such items as inventories, accounts receivable, and accounts payable. However, the statement of income and the balance sheet are the basic financial statements.
Higher standards are generally required for a stock offering, or purchase by a public company. Such transactions frequently require audited financial statements, where an accountant will want to make a “purchase investigation. " A purchase investigation is a normal audit with intensified examination of certain items critical in a valuation situation. The accountant may go to greater lengths, for example, to make sure that the physical plant and all equipment are present and in serviceable condition.
If financial records are inadequate or suspect, the accountant qualify the certification, or state an inability to render an opinion regarding the statements. This might happen if the accounting records were not prepared in conformity with generally accepted accounting principles.
Often the inability to get the company's statements audited can kill a deal. At best, it will cause intensive inspection by the buyer or investor, and probably lower the proceeds for the business owner.
John B.Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.