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Seller Doesn't Have Recent Financial Figures: What Should I Do?



Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor.   The owner selling the business doesn't have recent financial information or documentation but insists revenues are increasing. Should buyers believe the seller? What should buyers do in this situation? ProIntermediaries on BizBen answer the question of verifying seller / owner's financial claims.


Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Oh boy, I've heard this one before. This is actually a common statement made by sellers that have provided tax returns or year-end figures for last year but say they haven't got the profit and loss figures for the past several months. And in other cases, they will say have that they have not had a chance to file last year's returns and expect you, the buyer, to rely on numbers that are more than a year old.

Now, I have been involved with a few cases where the owner didn't keep accurate financial numbers and getting a good read on the health of the business was difficult, but these are rare instances. When someone is trying to sell their business it is highly suspicious if the owner can't provide financials showing recent profit and loss. Honestly, to me, it means that the seller is purposely withholding this information. In a case like that it's usually a good bet that the owner has something to hide. And I would advise the buyer to move on.

This would mean that the seller is "flying blind" while running their business, which I highly doubt. Perhaps the seller has two sets of books of records, one for the government and another for themselves, because they under-report their income, but the fact they want to show nothing to the buyer is a red flag. A seasoned buyer may not even trust the seller, and would rather do their due diligence through visual observation, looking at 12 months of inventory receipts, etc., things that are harder to fudge, but a business broker is really playing with fire by representing a seller who refuses to give financial figures, and could later regret getting involved if both parties were to get involved in litigation for fraud or misrepresentation at a later date.


Contributor: Broker/Consultant: Elderly Care Services
Owner's of small business's have to wear many many hats and all too often these Owners are great at one thing and maybe not so great at another. Can you imagine the Owner of a Residential Care Home for the Elderly who is asked to not only manage Employees, care for the Elderly Residents, manage California licensing laws, cut the grass and can keep their finances in order?

If the Sellers books and records of their financing or not in order don't worry. Simply utilize alternative forms of verification to prove the health of the business. In Elderly care home business's that might look like checking out their bank statements, the utility bills, Employee compensation schedules, Resident contracts, cashed checks, and so on.

Don't let fear of the unknown slow you down when checking out a business, just get creative and look from a different perspective.

Contributor: Transactional Attorney
You don't have to trim the shrubs, cut the lawn and wash the windows to sell a house, but the homeowner who doesn't is telling you they don't care much about maintenance. The same holds true with business sellers.

I agree with Peter and Craig that when a seller puts a business on the market without having at least made an attempt to put together updated financials it's a red flag. It doesn't necessarily mean that the numbers aren't improving, but it does mean that the seller lacks certain common business sense, which is not a good sign from the start.

If you believe the business has significant potential, is undervalued, or otherwise is unique, there are ways to evaluate whether the numbers are truly improving without formal financials.

The first step is to review the bank statements. If revenue is up, that should be reflected in the statements. If it's not, then you can stop the investigation and look for another business.

Even if revenue is up, you still need to evaluate expenses. The bank statements can help with this, but they often won't tell the full story. If you don't have the accounting background to do it yourself, the only true way to get a real picture as to what's going on with the business is to work with an accountant who can help you evaluate the numbers that are available (even if that means building them yourself) and comparing them with the historic numbers and trends.

The problem with this approach is that without recent financials there's nothing current for the seller to make "reps and warranties" to. Those are key components of your purchase agreement where the seller makes specific statements about the financials (and other aspects of the business). If those statements aren't true at the close you can avoid closing and if you find out later they aren't true, you have legal recourse after the sale (all assuming your contract is properly drafted).

The best option in this case may be to ask the seller to prepare financials and hold off on the deal until they do.

Business sellers need to be totally transparent if the expect to sell their business for more than the liquidation value of the physical assets, if even that. Without basic books and records, most businesses have no intrinsic value -- they become a waste of time for a buyer to consider and a waste of time, effort, and money for a business broker to represent.

I had a business I represented for almost a year with horrendous financial records. I tried working with the owner to recreate the books from raw data; I tried to get the owner to bring in a professional bookkeeper; I even got a potential buyer to volunteer to recreate the financials himself during an extended due diligence. But, in the end, the seller used every excuse imaginable not to cooperate -- "illness," "family difficulties," "lack of time," "depression;" and, after learning a costly lesson, I gave up. My time and talent (and money) can be better invested in working with sellers who are serious about cooperating and providing essential business data to a prospective buyer.



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