by Andrew Morgan
31st July, 2018
We talk a lot about making sure a motel’s presentation is up to standard before taking a business or property to the market for sale. The first thing we think of when talking about presentation is the physical aspect and look of the property. But what about the financial presentation of the business?
Supporting financial data to confirm what the Seller is saying about the business and how it performs is just as important as the physical standard of the property. An issue with either will turn a buyer’s focus away from wanting to pursue the business and onto others that are looking more attractive. How financial data presents can be covered a couple of different ways.
- So how do the numbers actually present? Not how high the income or profits are , but how they are presented on hard or soft copy. Do the totals add up? Don’t laugh, I have seen many addition errors over the years. The total expense amount is less than what the individual expenses total. Are the Seller’s Accountant’s supporting documents also attached to the profit and loss statements? Is the spelling of each entry correct? Again, don’t laugh, this is common. I have the same issue with spelling mistakes on a profit and loss statement as I do with an email. If I see an email come in and there are spelling mistakes in the subject line on text, I immediately think the email is spam and discredit it. The same goes for financial statements. I start to wonder who prepared this profit and loss statement, surely it was not the Seller’s Accountant. Again, I start to question the validity of the statements.
- Next comes the all important amounts. The Income & Net Profit must be as high as they can to achieve the full sale value in the market. Therefore I suggest every Seller has their Accountant prepare an Abridged Profit and Loss Statement. This will present the profit of the business as it should for sale purposes. It will have removed all Income and Expense items that are particular to the current owner and not the business. As an example an owner choosing to pay themselves a wage of $50,000 per annum as compared to $5,000 per annum, has nothing to do with the business, this is generally a taxation based decision. Profit and Loss Statements are generally prepared for Taxation Return purposes and to that end include expenses and tax deductions which inevitably present the lowest profit possible, or even a loss depending on each parties individual tax position. Adjustments will then be completed so the Abridged Profit and Loss Statement can be used for sale, refinancing or other purposes. If not, a true representation of the profitability of the motel business compared to other motel businesses would not be possible. Conversely it is also important to make sure that no legitimate operational income and expenses of the business have been removed. Even the most basic due diligence of the financial statements will determine this. The best result from this is that the end sale price of the business will be affected negatively if the profit has been overstated. The worst is that the transaction will be terminated altogether.
Aside from the Profit and Loss Statements being required by a potential buyer, other financial data such as monthly income and occupancy figures will be required for cash flow purposes. Council rate notices, electricity, laundry, rent (in the case of leases) and Insurance Invoices and Receipts (to name a few) will be required. These must all match what has been included in the Profit and Loss Statements. Providing monthly Income Statistic reports that include GST, will not match the Profit and Loss Statement. As long as the consistency of the difference of the GST is there, the issue can be cleared up quickly however if this is not the case, the interested buyer starts to question the accuracy and legitimacy of the data. If there are anomalies for a particular reason, be upfront and explain why this is the case. Never try to sweep it under the carpet and hope that the issue goes away. That never happens! Make sure all the data you as a Seller are providing matches up.
Buyers who are interested in buying a business want the financial data presented to them to be accurate. When their interested is sparked in a business it is based on the information that has been provided. If any anomalies arise they are probably more disappointed than anyone. Nine times out of ten the financial data presented will be accurate. There may be small differentials here or there but in the main these will not have a material affect on the profitability or value of the business and are easily explained or remedied.
No one buys the smallest of products if they are unsure of its validity and correctness, let alone a business and property. The credibility of the financial data being presented and the person presenting that data is paramount. Lose that credibility and lose the sale.