Reviewing Financials on an Acquisition
When you are viewing financials of a company, there are five sets of financials you want to take a look at.
- P&L – You want to take a look at some historical and recent P&L’s where the line items are broken down so you can see what is producing revenue, and specifically what expenses are driving the business. In many cases, you’ll be able to analyze anything that is necessary such as marketing or payroll and anything unnecessary that can be streamlined like certain office space, equipment, or donations to charity.
- Balance Sheet – You want to take a look at the balance sheet and get a good grasp and understanding of what is sitting on their books assets and liabilities wise. With any acquisition, you are either having the seller clear the debt before or shortly after the sale, or you are assuming some or all of the debt. That will be worked out in the agreement. Unless your agreement specifically states the seller is responsible for all debts prior to sale, don’t assume it is not your problem.
- Tax Returns – This is more importantly to verify the P&L’s are correct, meaning revenue and expenses are in correlation. If they are not, that doesn’t mean it is a dealbreaker. Many owners take a risk and understate income, but the key is to ask the questions necessary to see what is going on.
- Specific Financial Screenshots – Verify the revenue is cross-referencing with the source such as Stripe, Shopify, Paypal, etc.
- Bank Statements – Verify the bank statements have money coming in.
Obviously it depends on the deal how much of the five items you can dig through with scrutiny. For a small deal, you do not need to pick apart everything and sometimes tax returns won’t even be on the table. Specifically, if it is an asset agreement, there will be no tax returns on the assets if a parent company is spinning off some assets. The tax returns show a larger picture of the entire organization. For a large deal, you want to analyze everything that you can be supplied, and if they cannot supply everything find a work-around. If things are too messy for your liking, ti doesn’t mean it is a bad deal. it might mean the owner is unorganized, but if you are someone who cannot handle that and the documentation is limited, sometimes it is best to walk away.
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Leader in Acquisitions with Expertise in Representing Sellers & Buyers on Deals
Jarbly is a leader in acquisitions with expertise in helping with listings, negotiations, LOI's, asset purchases, company purchases, and real estate purchases. JARBLY has access to high net worth individuals if you are on the sell-side and businesses that may be of interest to you if you are on the buy-side.