Home Forums Money matters Purchasing a Business – checklist when analysing financial statements

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  • #999174
    jlev
    Participant
    • Total posts: 17

    Anyone have a checklist of things to look out for when analysing a business for purchase?

    Large YOY increases/decreases in costs/revenue, confirm everything with tax statements, etc. I figure there must be a checklist somewhere (and yes I realise every business is different) but I’m just struggling to find one.

    (business is bricks and mortar, no online, fulfilling maintenence contracts on specialised equiment for businesses)

    #1218151
    Peter – FS Administrator
    Member
    • Total posts: 1,889

    Hi jlev,
    While I think professional advice is always recommended, there are a couple of decent checklists I’ve come across as a start.

    A lot of the govt websites have guides such as http://www.business.vic.gov.au/setting-up-a-business/buy-a-business/checklist-buying-a-business

    And many of the banks have guides published too https://www.nab.com.au/business/moments/starting-out/buy-business/buy-small-business

    Some others are also around such as http://www.mccarthysalkeld.com.au/download/McCarthy%20Salkeld%20Due%20DIligince%20Checklist%20SECURED.pdf and https://www.seekbusiness.com.au/business-resources/checklist-for-buying-a-business. It’s probably worth going through a few.

    Another good phrase to search for background and professional help would be on how to do due diligence before buying a business. For example:
    https://www.business.qld.gov.au/starting-business/buying-business/buying-business-guide/due-diligence

    These will also help point you in the right direction before making any decisions.

    All the best with the plans!
    Peter

    #1218152
    jlev
    Participant
    • Total posts: 17

    Thanks Peter. I might be able to put something together from these, in particular the McCarthy-Salkeld one and the QLD government one. I’m mainly after the due dilligence stuff, something to guide me as I pore over the financial statements.

    #1218153
    steve201
    Member
    • Total posts: 278

    Hello

    The way I would do it as an accountant , is line up the month by month Profit and Loss Statements and Balance sheets and look for monthly trends up or down in the accounts. Cash is especially important !!!

    Then once youve established monthly trends, try and find out why they occured in the first place. If the accounting trends make sense, then you might be having a great business opportunity in front of you.

    Otherwise keep asking questions until you can go no further.

    Steve

    #1218154
    jlev
    Participant
    • Total posts: 17

    Thanks Steve.

    Do you have a list of “red flags” you look for?

    #1218155
    steve201
    Member
    • Total posts: 278

    The red flags I’d look out for are significant changes in cash balances across months, and changes in expenses that are not consistent.

    Basically what you want to do is align the monthly Profit reports and Balance Sheets side by side to identifiy inconcistencies so you can ask questions.

    Let me know if you need a hand?

    Steve

    #1218156
    Peter – FS Administrator
    Member
    • Total posts: 1,889

    Good advice Steve.
    I love the ‘keep asking questions’ comment too. I’ve been through this process once before and in addition to the detailed financials/reports etc… there is a lot to be said for having lots of face-to-face conversations to get a good feel for the operation.
    Cheers
    Peter

    #1218157
    steve201
    Member
    • Total posts: 278

    Hi Peter

    I’m am reminded of the harsh phrase,” the only stupid question is the one you don’t ask.”

    Not all of us are trained accountants so it’s really very important to ask a series of questions to identify how a business has operated under your guidance previously.

    You will come to a point where you will have a lot of information , both financial and non financial, and be able to ascertain if going ahead with a business purchase is worth the while.

    Thank you.

    Steve

    #1218158
    Peter – FS Administrator
    Member
    • Total posts: 1,889

    Yes, there is definitely a non-financial element (dare I say gut feel) that is part of these sorts of decisions. As long as you back it up with the data.

    #1218159
    steve201
    Member
    • Total posts: 278

    It’s critical to back up all business descisions with data or information that says scenarios 1 through 3 are wrong but scenario 4 is the right option.

    Without this you will, ‘ fly blind ‘ , and invariably select the wrong scenario.

    #1218160
    bb1
    Participant
    • Total posts: 4,485
    Peter – FS Administrator, post: 263219, member: 1 wrote:
    I love the ‘keep asking questions’ comment too.

    And the big point about this is if they are reluctant to provide an answer, cough up some paper work you want, or any other thing. Run, don’t look back because they are most likely hiding something. Said from experience, I ran and the bunny who took it up is now in a financial hole.

    #1218161
    Johny
    Member
    • Total posts: 840

    This is one of those times I reckon anyone proposing to buy a business that doesn’t have a background where they have some understanding of financial statements should seek professional help.

    It is such an important part of buying a business, and there is a lot of difference between ticking a box and really understanding the why?

    “Due diligence” is easily thrown around, but being competent to conduct it is another story.

    #1218162
    Tact
    Member
    • Total posts: 71

    Our firm specialises in business purchases and I was an investigator in my previous life so this is right up my alley.

    1. Don’t just rely on the financials. Management reports can be doctored any which way. Ask for third party verification like lodgements and bank statements.

    2. Do a lot of reality testing. If it’s a cafe and they’re reporting more than $10K in sales a week you’d best sit there one day and do a rough tally on how many customers are coming in.

    3. Value the actual business based on the “real” numbers. I get a lot of sellers claim that a business is worth “3 times profit”. This isn’t true. You’ll want to look at the IRR and the work you’re looking to put into the business to maintain or improve.

    4. Look for round numbers on the bank statement. There’s always a story when there are round numbers. ($10,000)

    5. Depending on the business you’ll need to check things like lease terms, council planning, DAs and any supplier agreements to see if the business is about to fall off a cliff and they’re looking to exit.

    Good luck and feel free to get in touch if you’re stuck.

    #1218163
    James Millar
    Participant
    • Total posts: 1,702

    DIY DD on large investments reminds me of a short term client that learned the hard way. They had been looking to buy a commercial investment property located in a high growth residential area for a while (they wanted to develop it into residential commercial mix). A property came up that appeared to meet their requirements and they met with us and discussed a few items (tax GST etc) before attending auction. I recommended that they seek a professional building property inspection for a qualified expert BEFORE making any offer. I told them it would probably cost around $1000 for a commercial site inspection but would be money well spent to avoid potential more costly issues. They politely commented that didn’t need one because after doing some research they could do their own assessment (the don’t know what you don’t know bit).

    Fast forward a month and I called them. They had purchased the property at the auction but were in trouble. Turns out the land was contaminated because it had once been used as service station with tanks covered many many years prior. The bank had various requirements for the commercial loan and they would not lend on that contaminated land – same answer from several banks (in our meeting they had advised finance was sorted but clearly also missed the detail on that front). They were weighing up options including immediately selling or sinking big money into decontamination experts just to determine the scale of the problem (think the quote on the initial report was $10k to $20k).

    I wonder how they feel about that DIY now.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1218164
    Peter – FS Administrator
    Member
    • Total posts: 1,889
    Tact, post: 263244, member: 79642 wrote:
    Our firm specialises in business purchases and I was an investigator in my previous life so this is right up my alley.

    Great advice, thanks for the contribution.

    I just have to say that I spotted your tagline in your signature “We specialise in sending business owners on European holidays.” Love it! A nice way to focus on the personal/emotional benefit of getting your finances in order :)

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