Buying a Business and Verifying the Results

Buyers of small businesses often have the trouble of actually verifying the financial information that has been presented to them. The difficulty stems from the fact that many small businesses are not as organized from an accounting perspective as larger corporations are. Also, small businesses often report earnings for tax minimization purposes so it is in their best interests to minimize reported income. For these, and many other, reasons it can be a challenging to buy a business for sale and know exactly what you are going for. If you are interested in purchasing a business in Canada, there are steps you can take to get a clearer picture of the results.

Financial statements
Ensure that you, or ideally your accountant, review any financial statements for the business. The statements should be prepared by an accountant. Sometimes for a small business, the statements are simply put together by the owner so these would require even greater scrutiny.

Tax information
Review any and all tax statements and returns that the business has. Examine corporate income tax returns, GST and PST filings (HST is coming to Canada in 2010 so this will be different)

Bank statements
Closely look at the bank statements. Make special note of large sums of money going in or out. You want to see a normal patter of bank activity for the business. They key is to look for any red flags that sometimes do occur when a business is for sale.

Business Inventory
Review the levels of inventory in the business and see if there are any swings that do not coincide with the level of revenue being stated. If inventory and cost of sales activity seems low for the level of sales reported then ask the question and consult with your accountant.

Expenses on the books
Sometimes a business owner may take some business expenses ‘off the books’ in order for the results to look better. Sometime staff or supplies may be paid in ‘cash’ if it is such a business. Take a reality check of the operating expenses and determine if it is a realistic level for the type of venture being operated.

Mystery shop the business
If the business for sale is one open to the public, such as a retail store, spend some time mystery shopping it anonymously. Go in at different times and at different days to examine customer traffic levels. You will also see the number of staff working to give you a sense of employee costs.

These points above are only a few of the issues you should examine when buying a business. Consult with your professional advisors to help you with the due diligence process. A business broker can also give you some insight into how to go about purchasing a company and what to look for.