Buying a business - books to look for?

I am in the process of looking at a business and premises to purchase. I can value the premises & potential easily. However the business forms a great part of the valuation and has a significant turnover. It is run by a sole trader and the accountant has given revenue turnover figures ( submitted to revenue) and refuses to give complete books as they would contain information on the clients assets etc. I wish to see a full set of books for the business showing gross/net profit. Given the extra risk involved in purchasing the business will this not lead to a lower figure for their client.? I certainly wouldnt pay as much. Is this the norm in business sales for sole trader businesses?

Sometimes. Whilst not in all cases it can be reflective of problems. Many business appear to be healthy on the outside as turnover figures can be healthy whilst after taking costs and overheads into account the business may be very sick. With this lack of information I feel the business can only be valued based upon it's physical assets. Without having some indication/proof of what the bottom line is you cannot value what you are buying.
Also even with the figures given can you trust the seller/accountant to provide accurate figures?

Why not contact your own accountant to conduct this aspect of the "due diligence", accountant to accountant?

If an accountant provides written confirmation of turnover as appers with revenue could you not sue them if this was misleading or inaccurate?

if they wont give me the figures why would they give it to my accountant?

money man said:

if they wont give me the figures why would they give it to my accountant?

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I don't know, why not ask the vendor?

'If an accountant provides written confirmation of turnover as appers with revenue could you not sue them if this was misleading or inaccurate?'

Indeed you could but you would have to prove loss, that the information was incorrect (how are you to find out), etc.. You will find that very few accountants are sued. I personally would not knowingly provide false information. I however prepare accounts from information provided by my clients. You also need to evaluate how close the link is between the seller and the accountant.

Before buying a business, you must do a due diligence. This means a full examination of the books, the assets, the debtors, the creditors. Otherwise, it is impossible to value the business.

Are you negotiating this on your own? Do you have the skills to assess the business and the books?

The usual procedure would be for a limited disclosure of information to be provided. You would sign a non-disclosure agreement.

You negotiate and agree a price for the business subject to a due diligence.

The price is often revised in the light of this information.

Walk away if they don't give you the information.

They might give it to an accountant more readily on the grounds that accountants tend to treat such information confidentially. However, I would not buy a business unless I got a chance to see it all for myself.

Brendan

Its not a very complex business (shop) and likewise Brendan I would like to see everything. I can value it at the property value (it is for sale by auction) but it makes it difficult to truely value the business and given their reluctance to provide the bottom line it does scare me off. I think i will hold off and see how the auction proceeds. I think that it is overvalued and will not sell at auction. Will have to wait and see.

As an accountant, I have dealt with several shop sales over the years and can confirm that it is standard practice never to disclose overhead and net profit figures to prospective buyers. These are largely irrelevant to the buyer anyway, in that many will depend largely on the lifestyle of the vendor, for example if they are employing their own kids in the shop at little or no cost. The buyer should be well able to find out, or work out, the major overheads anyway, without too much difficulty.

ubiquitous said:

As an accountant, I have dealt with several shop sales over the years and can confirm that it is standard practice never to disclose overhead and net profit figures to prospective buyers. These are largely irrelevant to the buyer anyway, in that many will depend largely on the lifestyle of the vendor, for example if they are employing their own kids in the shop at little or no cost. The buyer should be well able to find out, or work out, the major overheads anyway, without too much difficulty.

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On this rare occassion I cannot agree with Ubiq. IMO the main reason people make the mistake of buying a failed business is that they over-estimate the turnover and they under-estimate the costs involved. It is usually the detail that causes the problem. Levels of staffing, cleaning labour and chemicals, rates, repairs, insurance, security, theft, GP%, etc. all dictate what the bottom line should be. Most buyers also always assume that they can run a business better than the existing owners - does not always happen. At the very least I would need a trading account and extracts or proof of the major overheads including staffing and other items as mentioned above. Using industry standards does not work. Also how reliable is the turnover figures? Was the turnover 'bought' with sales and/or special deals. IMO by not supplying the detail you are disguising problems. Ubiq is correct in that any findings would need to be adjusted for the buyer's individual circumstances.