How “honest” are financial accounts?

Many business owners try to sell their business using smoke and mirrors. Hiding the fact that their business during the recession is not doing as well as it has done in the past. They claim a certain turnover but cannot provide any documentary evidence to back up these claims.

Business owner may present historical financial accounts to show that the business is capable of obtaining a certain level of trading; these historic figures are no guarantee of future performance.

But how accurate are these accounts?

One thing to remember is that an accountant will simply prepare accounts based on the information provided to them so there is no guarantee that they are accurate. Perhaps the best way of assessing how accurate they are is to ask to look at the books, if the books are kept well the chances are that the accounts will be “honest”.

I trained as an Accountant in the late 1980’s and prepared plenty of accounts, most of the small business accounts I prepared were from incomplete records. Often these accounts cannot have been 100% accurate as the information and explanations from the client may not have been accurate.

Also on one occasion when selling a business, an owner presented to me accounts showing an immediate jump in turnover of some 20% from the previous year, the business was sold on this basis. The new owner made a comment to me later when he wanted to sell the business that there was no way that these accounts were accurate, and that he had been “stitched up like a kipper”.

Cash takings are involved with many businesses and also the financial accounts will include “one-offs” or discretionary expenses that are not strictly necessary for the production of income. Often the profit stated in these accounts can be understated and if taken at face value can lead to many great businesses being turned down.

And from the sellers point of view the fact that they have tried to reduce their tax liability by introducing private expenditure into their business account, or by understating their turnover may have backfired.

Accounts unless they have been audited, (and that only applied to medium and larger sized businesses); often need to be looked at with a pinch of salt. They are an important part of the due diligence process but not the be all and end all of any buying decision.

This entry was posted on 06/08/2009 at 11:01 am and is filed under Selling Your Business, Buyers, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.