When you are looking at businesses for sale, it is important to look very carefully at the financial records of the company. Any company that is being sold will be looking to make their financial records look as good as possible so that they can make a high-value sale but, sometimes, this can mask a horrible reality of losses.
Taking the time to research and explore the real position of a business before you buy it can save you from losses and give you an understanding of how you can turn it around too. This article considers how you can go about checking the financial records of a business to uncover the truth before you buy.
GET AN ACCOUNTANT
When you run a business, you will need an accountant, so it is wise to make the effort to find one for the review stage of the process. Getting a good accountant is an essential first step because they will help you to better understand the financial records that you’ll be reviewing. They will be able to answer your questions and, most importantly, draw their own conclusions about the viability of this business as well. Financial advice is invaluable when you’re looking to buy a business.
Assessing the profitability is the next vital step, since this will help you to determine whether the business is actually something that you can make a profit from. To assess the profitability, you should measure all of the outgoings against the income so that you can determine exactly how much the company has been making. Remember that profits and turnover are very different things, and be sure to avoid falling into the trap of high turnover figures.
It is also very important to look at the liability of the company, as this is an area where you could potentially lose money. When you buy a company, you’ll be taking on its debts too, and you will have to pay these off from the profits of the business. Liability can exist because of historic borrowing or because of credit-in-kind schemes, so it is essential to recognise all that the company could owe.
Liability will also relate to the ongoing costs of keeping the business afloat, since having a large amount of stock means that you’ll be heavily invested. Recognising the liability is crucial in identifying the risks you face by buying the business.
The assets owned by the company are another element that you will take on when you make the purchase. This can mean buying warehousing property or purchasing a storefront location, so you’ll need to look at this closely as you would with any property purchase. Checking the real value of the assets and having them surveyed to ensure that you are not buying a crumbling building is a hugely important step to take.
REVIEWING THE BOOKS
When you are looking to buy a business, you will have to look very closely at the books and consider them with your financial advisor. Taking the time to look carefully at the profits, losses, liabilities and asset values can save you from making a foolish purchase. With a good understanding about the financial position of the company, you’ll then also be able to make a reasoned value judgement about the viability of buying and running this business.