Buying a business, just like buying any other item is a process that requires due diligence and thorough research before committing your hard earned money. There is an endless list of items you should check and questions you should ask but arguably the biggest question to ask has to concern the financial health of the business you are looking to acquire.
Failure to do your homework and thoroughly inspect the financial health of a business before putting pen to paper on the purchase agreement can lead to failure of business immediately after acquisition or inflation of costs required to run the business. While it’s a given that acquisition of a business calls for far more due diligence than just the finances, finances are the reason why we do business so we this article looks to guide a prospective buyer on some of the basic aspects to look into before purchase of a business.
This beckons the question, so what exactly should I look into when it comes to financial health of a business?
AUDIT THE BUSINESS FINANCIAL STATEMENTS
- Inspect balance sheets, profit and loss statements, annual reports, cash flow statements of the past for a particular period e.g the past three or four years.
- In the event that the statements aren’t evaluated, you’ll have to check the numbers against autonomous sources, for example, sales records, statements from the bank, invoices and loan documents.
- Audit their profit and loss statements:
*Can the business create enough cash to give you a sensible salary and get a profit as well?
*Look at the rate of development profit, sales and expenses .
*Could there be any new or expanded costs you ought to anticipate?
- Audit cash flow records:
*Know the accounts records thoroughly before you purchase.
*Are there any income or debtor issues?
*Are their bills being settled in a timely manner?
*Who are their key loan creditors?
INSPECT TAX RECORDS
Some business evade taxes by misrepresenting their tax returns either knowingly or unknowingly. It’s important to check the tax compliance of a business before you acquire it in order to avoid inheriting tax burdens and penalties from the seller. Ask for tax certificates if any and do your research,which could include consulting your countries tax authorities.
In some cases the entrepreneurs may misuse the business for individual needs and gains. They may purchase personal items and charge them to the business and so forth. You need to employ your analysis and those of your bookkeeper, to figure out what the real monetary value of the company is.