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Take good look at the balance sheet of firm

February 17, 2014

SAN ANGELO, Texas — Being an adviser with the Angelo State University Small Business Development Center for eight years, I have seen many small businesses go up for sale.

I also have seen many people who are interested in purchasing a small business. When valuing a business for sale, start by reviewing basic financial statements.

Let’s say a husband and wife have been working in his father’s small business for several years. They want to purchase the business from him. They know the market potential and the father has used an accountant to assist with taxes and other record keeping. How do they evaluate the company and gain the knowledge of what they should offer him for his business?

Two major financial statements should be reviewed with their accountant: the balance sheet and the profit and loss statement.

The balance sheet shows the assets, liabilities and net worth of the business. Items shown on the balance sheet may not tell the entire story. For example, is the equipment valued realistically? The equipment may be obsolete despite what is shown on the statement. Are the accounts receivable collectible? Also, the liabilities may not reflect a pending lawsuit or potential tax liabilities. These are just a few of the many questions to be asked to determine the value of a business.

The profit and loss statement is the next important financial statement to review. Are sales correctly reflected? Many small businesses deal with cash and do not deposit all the sales receipts. If so, how can the seller prove the correct sales? Or, when selling a business, the sales may be overstated.

The expenses may contain personal items that are not business related. It is a good idea to have an experienced CPA or business appraiser who represents your interests to represent you when purchasing a business.

In the example we are looking at we are probably dealing with a father who is trying to help his son and daughter-in-law as fairly as possible. Let’s assume that in retirement, he would like to have an ongoing stream from the business. Since the business shows good prospects for the future, structuring this deal will be beneficial to both parties. The buyers would like to give as small a down payment as possible to afford them maximum working capital.

This is not always the case though. Arriving at a total payout amount would require knowing more information than is provided in this example. The advisers at the SBDC can help if you want to sell your small business or if you want to purchase a small business. Give us a call or stop by the Business Resource Center at 69 N. Chadbourne St. We are here to help.