Financial Documents for a Business Sale: Red Flags to Look For

While some businesses have the potential to turn around for success, don’t throw caution to the wind. Many issues are hard to rectify, even if you are ambitious and forward-thinking.

As a buyer, reviewing financial documents for a business sale will help you determine if an investment is worth the risk, if a seller is being honest, and more. Keep reading if you want to learn how to safeguard your investment decisions.

5 Warning Signs to Watch Out for in a Seller’s Financial Documents

a calculator and business financial statements

Reviewing financial data is one of the first, yet most important, steps of the business buying process. It may seem unlikely or impossible, but financial statement fraud happens, so you need to be hypervigilant in your review and discussions with the seller.

More commonly than not, an owner isn’t trying to deceive, but you still need to be cautious of the data they’re reporting. Being able to read and understand a financial report will go a long way in making an investment decision. Here are five warning signs you should look out for in a seller’s financial statements.

1. Inconsistencies

Irregularities in financial documents can indicate unreliable or inaccurate data. Some common ones to look out for include:

  • Fluctuations in net income and retained earnings
  • Inventory discrepancies
  • Frequent changes in accounting methods
  • Inconsistent income tax payments
  • Variations in operating expenses over time
  • Divergence between financial statements and tax returns
  • Any unusual adjustments without proper justification

2. Declining or Unstable Revenue

If a business is losing money now, you must ensure it won’t be a problem later. Declining revenue can be attributed to a variety of factors, from increased competition, changes in market demand, or loss of key clients. If you spot unstable or erratic revenue patterns, you’ll need to assess the cause to determine if it’s something you can overcome when you take ownership.

3. High Levels of Debt

This one’s a given. Inheriting excessive debt is a significant hurdle and can greatly impact a business’s ability to grow and withstand economic downturns. You’ll want to assess the terms of existing loans and consider the potential risks associated with taking them on.

4. Unusual Expenses or Off-Book Transactions

Unexplained costs that seem unrelated to a business’s core operations may indicate improper accounting, while off-book transactions can affect your full picture of its financial health. If you have any concerns about unusual expenses, talk with the seller to understand their purposes.

5. Overstated Asset Values

While it’s common for businesses to value assets optimistically, be cautious of excessive or unrealistic valuations. It’s a good idea to conduct a valuation of assets through an independent assessment by enlisting a business broker.

Are You Making the Right Choices as a Business Buyer?

The best way to ensure you are? Working with a professional. Sunbelt Business Brokers has a team of experienced brokers ready to make sure you know what assets and liabilities you’re inheriting, that your transaction runs smoothly, and that it leads to your success. Find a location to get in touch with your local team!

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