Like most sales, Bob and the broker he is working with intend to make this an asset sale, meaning that Bob will keep all his accounts receivable, cash in the bank, etc. However, he will also assume responsibility for paying off all his accounts payable as well as other current liabilities, including credit card debt, a line of credit, accrued property taxes, and the current portion of an equipment loan. Making matters even worse, Bob must also pay off a long-term note payable of $181,000 in order to be able to transfer the equipment he is selling free and clear of any debt. Remember, you can’t sell equipment (the assets) unless you own them!
Believe it or not, Bob’s balance sheet, even though it lists a total net worth of negative $43,815, is still in a lot better shape than many I see.
Balance Sheet Warning Signs
On rare occasions, especially when a company is flush with cash, owners will borrow money from the business in addition to taking out a paycheck. They will treat this withdrawal as a loan, thus it will not be subject to payroll taxes, etc. Typically, this will be listed as a note receivable from officers. Unfortunately, this distorts the balance sheet because these receivables are rarely collected by the company.
The reverse situation also occurs. Owners often make short-term loans to their companies in order to make a note payment or even fund a payroll. The loan appears on the balance sheet as a note payable to officers. More often than not, these types of notes and loans rarely get paid back. Owners rationalize that they will be able to recover these funds when they sell the business. Guess what? That’s not going to happen. So if you want to collect on these loans, start doing it now.
If you would like me to check out your financials, send them to JohnStewart@quickconsultant.com or fax them to 321-727-2166. I don’t charge to look at them and they are treated with the strictest confidentiality. Maybe I’ll spot something you are overlooking, and if I do I will let you know.
New Video Released
I’ve just finished the first in what a series of free educational videos. It deals with one of most important ratios in our industry—sales per employee (SPE). To view the video, visit www.quickconsultant.com or watch it at www.MyPrintResource.com/video/10384116.