This article are provided for information purposes only, and are not intended as legal advice.


Did you find the right business for sale? Part II

February 11th, 2009

Yesterday I wrote about items to look at when you are in either due diligence or looking a little more closely at a business for sale and are deciding if you should continue to the next step.  Other items to look at in your due diligence are as follows:  Please note that this is a guideline and not a comprehensive list.

Look at all government correspondence in particular from all tax authorities.  Recently I saw a financial statement which did not reflect did not reflect a sales tax audit which was completed one month after year end but covered several years prior to year end.  In this case, the financial statements did not reflect the true liabilities of the company. If the purchaser acquired the company without knowing of the liability, they would have overpaid for the company.

 

Look at relationships on the financial statements.  If sales decreased and cost of goods increased, get explanations.  Look at relationships between the balance sheet and the income statement.  If sales dropped and accounts receivable increased, is there a collection problem?  Should the business for sale set up a bad debt?  How old are the accounts receivable? 

If the sales are dropping each month but all of a sudden increase just before the business if listed for sale, does this make sense?  Are these real sales or phantom sales, you need to investigate.

 

Has the method of valuing inventory changed?  if commodity prices are falling and inventory is based on historic costs, should inventory be reduced to reflect the lower of cost and net realizable value? 


Filed under: Buying a business,Due diligence — Gary Landa @ 1:06 pm


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