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You should also understand the business's methods of acquiring and serving its customers and how the functions of sales, marketing, finance and operations interrelate.The business's financial statements, operating documents, and practices should be also be reviewed thoroughly.
EVALUATION The following are the main sources you should use to evaluate a business for sale:
BALANCE SHEET Ask to take a look at the balance sheet of the business. This should give you records for accounts receivable, inventory, marketable securities, real estate, machinery and equipment, accounts payable, accrued liabilities, notes payable and mortgages payable.
INCOME STATEMENT Check the income statement. The potential earning power of the business should be analysed by reviewing profit and loss statements for the past three to five years. The business's earning power is a function of more than bottom-line profits or losses. The owner's salary and fringe benefits, non-cash expenses, and non-recurring expenses should also be calculated.
FINANCIAL RATIOS Check the financial ratios. While analysing the balance sheet and the income statement, sales and operating ratios should be calculated in order to point out areas requiring further study. Key ratios are the current ratio, quick ratio, accounts receivable turnover, inventory turnover and sales/accounts receivable. Look for trends in the ratios over the past three to five years.
ODDS AND ENDS Find out the situation with the business's leases, personnel, marketing, patents, taxes, legal issues and competitors.
OUTSIDE HELP These factors for evaluating a business have to be carefully scrutinised and weighed. Seek out professional assistance if needed to interpret the significance of the information. In most instances, all of the business records should be made available to you. In some cases, however, certain information may be withheld until a bona fide offer, contingent upon obtaining that information, has been made.
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