Article By Blanket Real Estate…
Now you are ready to look at sales revenues. You should have started you Business Plan by now – so you should have some idea of the demand for the products/services of the business you thinking about buying. In any event there are a slew of methods you can employ to check the sales of the business.
Let’s start with the easiest – the tax return. Add to this what the Owner told you – when you asked – he doesn’t report. Don’t believe whatever he tells you – but note it anyway – see if it agrees with what you find. Perhaps he has kept the original receipts of what he didn’t report (why a Owner would keep them or show you if he did – is a mystery to me – but if he did and he shows you – its better than just him telling you. In any event still be skeptical – very skeptical.
Now let’s verify some of these numbers. Get the bank statements – add up last years deposits – do they agree with the number on the tax return? If they don’t – ask the Owner why? Another way to get an idea of total sales (especially when you think or know there is some unreported income) is to add up his total purchases of merchandise bought and used last year (don’t forget to include the adjustment to beginning and ending inventory). Since you know the GP% (from previous article) – you can figure sales (assuming of course he didn’t pay cash & throw out the receipts for some of the purchases that year).
You should be getting comfortable with actual sales volume by now – but if still in doubt – you can make arrangements to personally observe the operations – add up sales in the store at the end of the day – do this for a week or two – or longer if necessary. If the business your buying isn’t seasonal or cyclical – you might get the picture of what’s going on. If your still not sure you must now become a detective or pretend you’re an IRS Revenue Agent.
There are almost fool proof methods for checking every business. For instance – sit in your car – count customers coming in – you should know the average customer sale – so do the arithmetic. Buying a Pizza restaurant – find out from vendors how many boxes – pounds of cheese – cans of sauce etc was used last year. For a laundromat – go to the town – find out total water consumption – for a car wash determine traffic count – for a gas station & “C” store get gas purchases from the supplier – with this readily obtainable info – you can determine sales activity fairly accurately – when compared to the other methods described above – you should be able to verify or determine sales volume. If you can’t or still not sure – then use the tax return figure and forget anything else the Owner tells you. But keep this in mind – you may be paying the Owner for the sales volume he’s achieved – but you are buying the business for the sales volume you will achieve – based upon your ideas for marketing – promotion – better service and hours etc.
The above will help you determine actual sales – what you do with this info – is up to you. Next time we discuss…