Weak business documentation means important information about how a company operates, generates revenue, and complies with regulations may be unavailable, scattered, or held in memory.
In simple terms, weak business documentation occurs when an individual or business fails to establish and organize written records that detail all aspects of the business.
Inadequate documentation in business can reflect in the following:
As soon as a potential buyer begins due diligence on verifying all claims in a business, poor business documentation creates an immediate problem. Two considerations come into play: risk and time.
The risks of poor record keeping are considered direct threats to future stability by:
Buyers can be seen as investors searching for a safe return. A business with incomplete business records portrays a disorganized past and an unstable future. The buyer believes that whatever is not documented is worse than what is being presented.
Why weak documentation lowers business value is easy: risk decreases multiples. The valuers calculate multiples such as 3x profit to estimate company valuation. With each risk perceived, from poor documentation in business to owner dependency, this multiple will decrease accordingly.
A sale will not proceed without your proactive delivery of documents that establish your business is stable and transferable.
Every buyer would demand a due diligence file including, at least:
Smaller businesses will require a set of documents that focuses on establishing transferability. One of such documents comprises:
If you have missing business records, the sale will come to a halt. The buyer can put a holdback on your sale until you supply them with these missing records or simply walk away from your Letter of Intent. The worst damage will come in the form of a loss of trust, where they will question everything else you have to say about your business.
Good documentation is basically a form of risk management in writing. Taking this into consideration, a good document must possess the following qualities:
Effective documentation is required to meet regulatory requirements. As a merchant handling customer information, such as names, email addresses, or credit card numbers, you must document applicable regulations, including GDPR and CCPA.
Poor documentation can impact information security. For example, if passwords, security procedures, or IT network diagrams are not documented, the system’s information security will not meet the new owner’s standards.
The good news is that weak business documentation can be repaired before you put your business up for sale.
One of your jobs is to provide a centralized and organized platform for all documents. Setting up a documentation management system-whether it is a common cloud storage solution such as Dropbox/Google Drive or a knowledge management tool such as Notion/Process Street-can bring with it the benefit of ensuring immediate access to all documents for the buyer.
Training staff on good documentation methods will transform a one-person business into an institution. Documentation must become a necessary part of each new process so that your knowledge base is up to date and accurate years after you have left.
Poor business documentation is the silent killer of many deals. Poor business documentation creates buyer concerns and weak documentation, which leads to heavy discounts and crushed sales.
To control your exit, you have to focus on documenting your business. Through systems implementation, cleaning up your finances, and documenting your business processes, you can prove your business is a mature and stable asset that can be transferred without difficulty.
Weak business documentation can include missing Standard Operating Procedures on critical activities, missing financial documentation such as clean Profit & Loss statements or receipts.
The impact of poor record-keeping on business sale value matters when considering how a risk discount is applied by buyers, thus immediately reducing a multiple of valuation.
Among the documentation necessary to sell a small business are clean, verifiable financial statements over a period of three years, all legal contracts in place, detailed SOPs, an up-to-date inventory of all online assets and passwords, and HR documentation.
Weak documentation leads to business documentation risk, which lacks proof of compliance with rules and regulations, such as data privacy acts.
The most effective ways to fix poor documentation before selling a business include spending time documenting SOPs for all repeat activities, utilizing a documentation management system, and staff training on good practices in this respect to achieve business continuity.
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