Charting its fortunes from the day it began trading, a business-for-sale's accounts are central to the process of buying a business.
Having access to the most recent 3-5 years trading figures is imperative for the business buyer. Careful scrutiny, with the professional help of an accountant, is important if you're to choose the right business and pay a fair price.
When you're appraising the accounts of a business for sale, you may also have one eye on how to improve those accounts post-sale too - especially if you've paid a knockdown price on account of a messy balance sheet.
BusinessesForSale.com commissioned a top business-transfer agent to write some tips on checking the accounts of a business for sale, as well as a leading accountant for some advice on how to improve and manage those accounts once the sale has gone through.
Due diligence: checking the accounts
The following tips are formulated by Derek Burgoyne FNAEA FICBA, a business-sales agent for Cornerstone Business Agents - specialists in the sale of Scottish businesses:
Whilst it's always a good idea for prospective business buyers to seek independent advice when assessing a business opportunity, a few quick basics should be considered when first looking at a business's accounts:
- Checking the turnover and comparing it with previous years' figures to assess the way the business is going is a good place to start. Then check the gross profit percentage to ensure it is line with similar businesses. Any anomalies should be investigated.
- Wages are often the largest overhead. Get to grips with the wages and whether they are higher or lower than you would expect for this type of business.
- Then examine the rest of the overheads, remove personal costs such as depreciation and finance and adjust the remaining cost to reflect the way you feel a competent owner/manager would run the business.
- Net profit can then be adjusted to give you a good idea of the business's true profitability.
Managing accounts once the sales goes through
The following tips come courtesy of Alan Drummond, MD of Douglas Home & Co, based in Kelso, the Scottish borders. Alan has a broad experience from dealing with city-based clients to those in the agricultural sector:
You've bought the business and now you need to get to grips with the accounts. Here are some pointers:
Keep it simple but effective: if the system is complicated, be prepared to start again with a completely new one. Always use a tried and tested system and avoid any "bespoke" options until you understand the business properly.
There are no shortcuts:
- Check that the bank, debtors and creditors match the list of who owes you, who you owe and the money at the bank on a monthly basis.
- Check VAT rates on the system and that the best method is used (eg, a flat rate)
- Go through each expense category and decide if they are sensible and sufficiently detailed.
Get the timing right: Check supplier payment terms, customer's credit terms and the timing of when invoices are raised each month and follow up for settlement.
Leave no stone unturned: Review how cars and fuel are treated. Make sure all expenses are claimed and that all tax relief available is claimed on the assets (including embedded fixture and fittings)!