Proving the figures

Posted on Dec 11 2015, in Resources for buyers

Once you as a potential buyer is satisfied about the business that you would like to acquire, your next step will be to put an offer to purchase in writing to the seller. It is important however to ensure that such an offer to purchase also stipulates that the agreement is subject to the seller proving the business profitability. In most instances you will find that the typical business owner does not attend to his record keeping in such a way that it is available (or even understandable) to a third party.

The typical owner of a medium to small business does not need to “report” to someone else on his business activities and for this reason does not keep accurate records of all his business expenses. You will however be able to get a fairly good indication about the business if you have certainty of the turnover/sales.

You may use one of the following methods in proving the sales figures:

1. VAT Returns

All businesses must either, on monthly or bi-monthly bases, complete and forward returns to SARS on their sales figures. (Only those businesses with turnovers with less than R1 million do not need to attend to this.) This will be your most accurate indication if the turnover that the seller claims his business is generating is correct. A twelve month period of VAT Returns will be sufficient for this exercise.

Just be aware that if an owner is operating two or three businesses under the same name, this test will not be of much assistance.

2. Financial Statements

Do not be concerned if the typical business owner does not have up to date financial statements available on hand – THIS IS NORMAL. You should however not proceed if the financial statements cannot be produced to your satisfaction. Though many business owners might complete their VAT returns themselves, it is usually an accountant that will draw up the businesses financial statements. This third parties involvement on reporting on the business activities will be a good indication of the “true picture”.

3. Monthly Turnover

Many businesses do have monthly turnovers available. This is especially true for businesses that sell their product or service on credit. These figures will assist you in detecting any seasonal trends within the business sales.

4. In-house Accountants

The more sizable businesses might have a person in-house that looks after its accounting records. Once your offer to purchase the business has been accepted and the seller “has opened his books” for you, your best bet to get the correct numbers would be to sit down with this accountant.

5. Bank Statements

All businesses need a bank account to operate effectively. You can use these bank statements as one of the best methods to confirm the business actual income. The bank statements are a wonderful tool to use to have a look at the businesses cash flow. Do bear in mind that the bank statements may not correlate with the business declared or actual turnover. Three to six month’s bank statements are sufficient to detect any irregularities in the business income.

6. The Portuguese Audit

Though it might be a time consuming effort it is certainly not a waste of time. This method to test the turnover figures involves you “standing behind the till”. This allows you to be in the business and see the day to day operation of the business and get a true feeling for the sales of the business. It is a good idea to also keep record or notes of your own findings during this “Portuguese Audit”. Bear in mind that your professional business broker will never advise a seller to allow a buyer into his business without a signed agreement and a deposit paid.

7. Debtors List

A business selling on credit will definitely have a list of debtors and this will be invaluable in confirming the sales figures. It might even be much easier to confirm the turnover of a business that does not accept any cash, because all of its turnover will then reflect in the debtors account.

Sales figures must be proved. If you are uncertain do ask your broker for assistance, but bear in mind that the broker acts as agent for the seller. The professional broker will however be of immense value in assisting you in obtaining all the information.

Do allow yourself enough time for your due diligence.