Interesting Balance Sheet Entries!!!

In reviewing dozens of balance sheets in preparation for an upcoming column, I couldn't help but note some really questionable entries that caught my attention. Here are just a few:
Here are some interesting entries found under ASSETS:
(1) Other Assets - Goodwill/value of existing accounts - $48,000 (Goodwill is the difference between asset value and the selling price of the business and is determined by the value placed on the business above and beyond the asset value; this entry has little significance or meaning when it comes to valuing a business.
(2) Note Receivable - New Project - $96,000 (the company loaned owner this amount and owner owes it back - Sure!)
(3) Shareholder Receivables - $118,000 - This type of entry represents an amount of money loaned to the company by the owners and hopefully supported by a formal note of some type. No buyer in his sane mind is going to incorporate this amount into his valuation of your business. If you expect to get paid back, you better do it before you attempt to sell.)
(4) Goodwill (once again)... $1.1 million less amortization of $100,000. (Boy, at first glance this makes the net worth of the company look pretty good at first glance. Remember, most sales are structured as "asset sales" and "goodwill" as shown on the balance sheet has little relevance in the valuation process.)
(5) Non-Compete Agreement - $46,000 (This is not considered a tangible asset and once again will not be considered in the valuation process - sorry!)
(6) Pre-Opening Expense - $10,500 (This is a typical entry found on many franchise balance sheets - The only way you recover anything like this is from the excess earnings and multipliers used to calculate the value of your business. Nobody really cares what you spent eight years ago to open the business, they only look at what they consider to be its value TODAY!)

Ok, here's some sample entries under LIABILITIES:
(1) Notes Payable to Tom & Cathy Smith - $93,500
(2) Notes Payable to Mr. Bill Stevens - $4,500
(3) Notes Payable to J.C. Aramson - $74,000
(4) Shareholder Loan - $291,989

All of the above entries share two things in common... (1) they represent loans made by the owners or shareholders to their company... i.e. owners were forced to loan their companies money in order to pay bills, make payrolls, etc. They are shown as liabilities because technically the company is obligated to pay these loans off, with or without interest. (2) these liabilities are rarely satisfied and remain on the books indefinitely. Once again, buyers could care less about these types of liabilities unless they are tied to assets they are buying and in that case buyers expect those types of liabilities to be taken care of prior to settlement.

(1) Line of Credit - $123,000
(2) Line of Credit - $325,000
(3) Line of Credit - $89,000

Now these types of entries are different, because they must be paid off by the seller prior to selling the business, and yet they are not directly incorporated into valuing the business.

Well, the above has already gotten lengthier than I had planned. I will be dealing with it in more detail in my next column. At least the above will provide you with some food for thought.

Read my recent column on ratio that will shock many owners! Visit my website at: http://www.quickconsultant.com/