In addition to financial statement ratios, here are some things a potential business buyers will consider. This is a resource if you’re looking to buy – or if you’re looking to spruce up a business (or business note) you’d like to sell.
Financial Details. If at all possible, examine the detail underlying transactions for the business. Many entrepreneurs use a business as a tax write-off for items they buy and use personally. This can affect the numbers you’re reviewing in the financials, so be on the lookout for these types of transactions.
Inventory. What do the inventories look like? If you are able to examine the inventories in person, consider whether they look brand new, or whether they have an inch of dust resting on them, implying that they’re not selling. Trust your gut – do you see customers actually wanting to buy this stuff? You might consider taking a business valuation specialist, such as a business broker, with you for this inspection.
Furniture, Fixtures, and Equipment. Much like the inventory, what does it look like? Is it new, or old and broken down? Can you use it? Will it attract potential buyers to your business? Can you use it, or will you have to modify what you have (i.e. pay more money) to make it work? Is it paid in full, or are there still leases in effect that you’ll have to pay?
Liabilities. What does the business owe? Are there outstanding loans or leases? Mortgages? What about contracts with suppliers or employees? What about outstanding liens or other liabilities? Get a good idea of what the business owes – and what you’ll have to pay. A lawyer can be particularly helpful in finding this out.
Taxes. Does the business owe taxes to the IRS or to the state? Are there back tax bills that need to be settled?
Accounts Payable and Accounts Receivable Detail. Again, if possible, take a hard look at the underlying vendors or clients that make up these numbers. Get a solid understanding of the creditworthiness of the business’ clients. How likely are you are to get the cash you’re owed? How much, and how soon, will you have to pay your suppliers? A profitable business means nothing if there is no cash flow, so if Accounts Receivable aren’t converting quickly to cash, this is a red flag. Are those A/R sales legitimate, or could they be fraud?
Returns. Pay close attention to any returns figures listed on the financial statements. Again, this is a favorite place to hide fraudulent “sales” that aren’t turned into cash. Even if there’s no fraud, a high rate of returns does not bode well for the profitability of this business.
Industry. Consider the industry this business is in. Is it a growing industry with lots of potential, or is it stagnating? Is this an emerging line of business that is untested?
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