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What is the best way to check out whether a business is as financially sound as the seller says it is ??

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We are financial consultants to a group of investors whom we have their consent to manage their funds which is in our custody for cooperation in joint venture business investments.

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Jesse Peterson
phone: (980) 239-7539
email: info@interventionmortgagefirm.com
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Jun 6, 2017
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Freedom Business Brokers
Orange County, CA

Bank Statements and Credit card accounts are primary sources to verify sales.If this business has none of those then go for buying invoices if this is a retail business and add an average margin of profit prevalent for that kind of bisiness and this way arrive at a gross income then deduct expenses and find net sales. If this is service oriented business you have to check how many accounts are repeat.See the individual invoices for orders and compliance materials. it is not difficult as it sounds.
Best thing is hire an experienced broker who has some knowledge of analyzing businesses and who represent you exclusively. If buying a corporation then you need an accountant who can check stocks and assets.If this is a franchise contact the corporate office and get the sales for that office.
All depends on what kind of business is in question.There are different approaches for different businesses. sid0653@hotmail.com

Sep 25, 2010
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The BAF Group LLC
MD

@ Robert Gresham, I have absolutely no argument with anything you said. No question that you are 100% correct. It was not what you did say, but what I felt needed to be additionally pointed out. There was no implied criticism. But I believe that you and I, in the day-to-day business we each conduct, sometimes take certain details for granted, that can be lost on the novice, especially in the brief passages of these commentaries.

Sep 23, 2010
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Robert K. Gresham LLC
Attorney
GA

@Don Barrick,

Everything you say is correct, and excellent advice, but shouldn't be too sticky an issue with parties represented by counsel on both sides who will negotiate diligence practices that serve their respective clients' privacy needs. Haggling over the nature and extent of diligence is a necessary "pre-LOI" discussion that is all too often skipped over in favor of very summary diligence provisions in an LOI adapted from a prior deal by the buyer/principals. Getting the diligence process buttoned down and understood by all parties early on is one way deal counsel can keep legal and other fees down.

But absolutely, parties should never conduct any sort of business or legal diligence without having the other party sign off on it, and I don't think I stated or implied otherwise.

Sep 22, 2010
Buy-a- Company

Also check the P&L's against the bank statements and merchant accounts. If they accept credit cards, merchant account statements show the daily cash flow from credit cards. Bank statements for checks and cash payments. You should be able to match them up. i.e. If they show $20k in sales for a month, you should be able to find $20k in receipts at the bank, and match the sales from credit cards to the bank statement as well. Credit card payments get deposited in their bank account daily.

If they accept payment terms, there will be accounts receivable entries for each sale and payment. Match up the new term sales to the AR account. Match any AR deductions (payments from customers) to the bank statement.

This is not as hard as it sounds.

Sep 20, 2010
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DJB Business Brokers
FL

Have the tax returns audited against the sale & use tax.

Sep 20, 2010
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The BAF Group LLC
MD

Barry, I agree almost 100% with everything Julie Barnes has ever uttered! And Robert Gresham offers excellent insights; however, without arguing with him, I would mention one word (or many words) of caution.

Mr. Gresham states, "Talk to vendors, suppliers and customers, even go to them in cases where supply or revenues derive from a concentrated base." While I agree with him in principal, it is terribly dangerous to do this in a cavalier manner. For one thing, any Non-Disclosure or Confidentiality Agreement you might have signed, prevents you from contacting the very people he is suggesting you question. This means that you need to be legally, very careful in conducting these kinds of interviews, and it must be done with the agreement and cooperation of the Seller, and your own Attorney to guide you, as well.

Moreover, timing and methodology in conducting these kinds of investigations are critical, even if you do not have such an Agreement. Questioning Customers or Suppliers has to be in such a way that you obtain the information you need, without alarming them. You don't want to do things in a way that would cause a Customer to go elsewhere, because of a possible sale of the business you are looking to buy. Or for a Supplier to cut off what could be an excellent, ongoing relationship with the business, because of his uncertainty about you, or the current Owner's methods in dealing with final invoices - which could result in the Seller's inability to continue operations. I have seen this happen!

As a Business Broker, I see the sale of any business as a team effort, with the Buyer and Seller, the Buyer's Accountant, the Seller's Accountant, the Buyer's Attorney and the Seller's Attorney all working together for a win-win transaction. As a Business Broker, a large part of our role involves bridging the communications between all parties. (At one settlement, I wore a referree's uniform and a whistle, in order to lighten the mood and get two attorneys who hated eachother communicating in a more relaxed atmosphere!)

So, I am not disagreeing with Mr. Gresham; I value legal input, on all transactions. But I am stating that caution MUST be used, in this area.

Sep 20, 2010
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Robert K. Gresham LLC
Attorney
GA

Financials are of course the standard measure of financial health, but financials in many small and medium sized businesses are nearly infinitely variable in quality, accuracy, amount of tax planning, etc., and I consider them a starting point for the actual process of estimating financial soundness in a target.

First, as an aside, but an extremely important one, skimping on actual business and legal diligence and relying on reps, warranties and covenants in the deal documents for protection is a serious mistake that leads to untold amounts of litigation. When buying a business or specific assets, you just have to buckle down and do actual legwork.

Spend lots of time onsite at the business's operational centers. Watch carefully what is going on. Is the level of activity "on the floor" commensurate with what is reflected in the financials? Can you eyeball the big ticket assets that generate the revenue? Have you spent enough eyeball time to thoroughly understand the company's revenue engine? You should be able to look at an income statement and link all the material items on that statement to an actual process you have seen personally, preferably more than in a cursory way.

Talk to vendors, suppliers and customers, even go to them in cases where supply or revenues derive from a concentrated base. For obvious reasons, wise vendors and suppliers will not give you the most objective picture, but verifying that they exist, and especially verifying the company's larger customer relationships, should go without saying, but it is amazing how many buyers do not take these steps.

Buyers often hire third parties to conduct this type of diligence, and that's fine, but don't rely on that to the exclusion of doing your own legwork.

So in summary, the best way to check out whether a business is financially sound is to combine financial statement analysis with third party sources and significant, actual on the ground legwork.

Sep 19, 2010
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visit http://www.franchiseexpo.com to help you answer the questions you are concerned with when choosing your type of business. Their franchise directory will assist you on your way to a successful future in the franchising world!

Sep 19, 2010
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Hello Barry,

The previous advice might prove valuable if a company is registered with Dun & Bradstreet - unfortunately, most SME's (Small and Medium Sized Enterprises) are not. Short of an audit - a substantial investment -, I would suggest reasonable reliance on tax returns. Although there are certainly cases where expenses are paid in cash and not reported (mostly subcontractors), income is rarely overstated for obvious reasons.

Please visit my blog: http://www.AustinBusinessesForSaleBlog.com to find more advice about how to evaluate a business.

Good Luck!
Thanks
Julie A. Barnes, CPA
President, SBX, Inc.

Sep 19, 2010
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Biz2Credit LLC
New York County, NY

Barry,

Biz2Credit (www.biz2credit.com) has partnered with Dun & Bradstreet to help to check the financial information of company to be acquired.

Sep 19, 2010
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Biz2Credit LLC
New York County, NY

Barry,

Biz2Credit (www.biz2credit.com) has partnered with Dun & Bradstreet to help to check the financial information of company to be acquired.

Sep 19, 2010

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