Article By Blanket Real Estate…

Last time we were discussing labor. Remember – we are adjusting the tax returns of the business you are thinking of purchasing for personal items, one time items, extraordinary non recurring levels and some non cash accounting entries. Ask the Owner the name, function, how paid (on or off the books) and amount paid. Add everything up and annualize. The total should be reasonably close to what is shown on the tax return. Make any addition or subtraction entries. Note – you will adjust these figures for unnecessary family labor or for family labor that’s not getting paid. When done – the final labor cost will be the total you can expect should you buy the business. One last point – don’t put a labor cost for youself. The reason being you may over value or under value your services. This is not the place to decide what you are worth. Save it for the end – What’s left after paying all your expenses. Did you get a fair salary? A return of your investment? A return on your investment?
Moving up the tax return we come to the Cost Of Goods section and Gross Profit. In my opinion – this is the most important part of your number crunching. (Determining sales volume is more important overall but…) You don’t need to be an accountant to see if the Owner screwed up this section – whether by accident or on purpose or maybe just lazy or sloppy in doing an accurate ending inventory. You just want the facts – the actual gross profit percent of the business your thinking of buying. Once this percent is obtained – you can apply it to the sales volume directly to obtain your gross profit dollars. This step must be done at the store. Look for representative items of what the business sells – note the retail price – go to the invoice – see what the item costs – subtract & divide – get the gross profit percent. Keep doing this till your comfortable with what the overall gross profit percent of the business is. Compare to the tax return and standards from reference books in the library or internet. If your result is different – do more samples – ask questions – but for better or worse the percent you obtained is probably the percent you will get when you buy the business.

Now we can go to the top of the return – revenues. Don’t get mushy on me at this point. We aren’t determining the value of the business so any philosophical ideas you have on unreported income needs to be thrown out the window – here and now! Your only concern is to determine: (1) what volume the business did in the year you’re examining and (2) what volume you expect to make in your first year of operation. Why? The Owner of this business may have inflated sales – either thru outright falsifying the results or perhaps selling at a lower price to increase sales (you’ll probably notice this in your gross profit check). If you’ve been following these articles…more next time..