Article By Blanket Real Estate…
The Broker just gave you the first few items that you should have requested – last 3 years of the Businesses Tax Returns, a trial balance from the Seller’s accountant, sales tax returns, check register, last years bank statements and current year to date P or L along with same period last year.
Don’t be too concerned that you didn’t get all these items – especially for a smaller business – Why? Because the owner – whether you like it or not – can believe it or not – may not have some of these items. All this means is that you’ll have to do it yourself from the checkbook and receipts. As you will recall from my previous articles – I prefer starting with a blank piece of paper anyway – to do a current P or L of the business.
If you followed my suggestions and have begun doing a Business Plan from the questions you’ve asked the Owner in previous meetings and the research you’ve done on your own – you should have a good idea of sales revenues – the expenses are easy – check the latest garbage bills – utilities – insurance etc. But when the above materials are available – use them.
OK – now that’s out of the way – lets continue… First if you have them – compare the accountants P or L to the Tax Return. The P or L will be more detailed – e.g. the utilities line on the Tax return may have only one figure – the financials will show each expense like gas – electric. Try to match up each item on the P or L to the Tax Return. (If you received the accountant’s trial balance – this step will be done for you. Once completed any item noted that doesn’t make sense – must be researched.
Now put the P or L’s away and work from the Tax Returns – they’re easier and less complicated. Next you have to adjust the Tax Returns – that is remove any non-recurring items – any Owner’s personal stuff that has nothing to do with the business and some accounting entries that have nothing to do with cash flows etc. etc. etc.
On a blank paper show item name in the first column – sales, cost of goods, gross profit, expenses etc. In the second column write the corresponding figures from the Tax Return. In the next 2 columns show + adjustments and – adjustments. Here you will add and subtract items that do not have anything to do with the business and the way you plan to run it yourself – which may be different than the way it is presently being operated. For example – you probably won’t be making payments for the Owner’s car, health insurance for himself and family, his interest payments, the depreciation and/or amortization charges, his gas and repairs – especially in a business where a auto isn’t necessary, owner’s salary etc.
All of these would be minus items. Plus items would be current rent expense if higher than the Tax Return year, labor not shown on the Tax Return (don’t forget to increase sales revenues too for this item). Speaking of labor – show plus or minus on how you plan to run the business – the previous Owner may have his wife and kids working – are they getting paid?…more next time…