Buying a Small Business That Doesn't Have Proper Financial Information

Buyers of very small businesses are often attracted by the relatively small size of the investment, the potential simplicity of the operation and also the entrepreneurial tenacity involved.
There are many businesses that operate as ‘one person show' where it is essentially the owner, perhaps a small leased premises and some tools, equipment, vehicle and a customer list. There are countless businesses such as this in the marketplace. These ventures are attractive to people that are looking to ‘buy a job'.

A common issue with such ventures is that the financial information that is available to the buyer is not always in top order. Sometimes, the owner operates with little more than a shoebox full of receipts, purchase orders and other "documentation". As a business buyer, you must be careful about protecting yourself so you know what you're getting yourself into.

Consulting with an accountant to advise you is still highly recommended. That being said, what if you are still interested in the small business and the financial information is not in the form of accountant-prepared financial statements? There are a few things you and your accountant can think about to verify the revenue and earnings.

"Cash only" businesses
Businesses where there the revenue is primarily cash and a large portion of it is unclaimed is very difficult to sell - and very difficult to verify to a buyer. The only reasonable way to audit the accuracy of the business financial operation is to sit at the cash register for a reasonable period of time to verify activity. In a seasonal or cyclical business this may not be as practical though.

Businesses that operate as sole proprietorships
There are a number of businesses that operate as sole proprietorships and the revenue and expenses of the business are intermingled with the owner's personal expenses or other income sources. The business may be a simple operation without accountant-prepared financial statements. In these instances, there likely is an unconventional paper trail that must be sifted through. Here, a business buyer could examine things like income tax returns, sales receipts, purchases, inventory levels (if there is inventory) and other ‘clues' to verify the income.

The point of this article is that there are many excellent businesses in the market that are run well, have good earnings and are price appropriately - but they're books are not the most organized. In fact, there are quite a few of these. As an entrepreneur, you do need to protect yourself, absolutely. Don't be overly quick to write-off a business for sale simply because it doesn't have audited or review-engagement statements. There may be a middle ground where you can give the seller the latitude he or she needs while also protecting your interests. A reputable business broker or chartered accountant that has experience in small business sales can assist you.