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Buying a already profitable business, now to due dilligence

BrandonS85

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I currently own/run a decently successful real estate rental company with a total of 71 rental units. Making great cash every month, equity and growth is pretty good.

Recently I ran into a local business that has several sources of income just at one location. The owner is older and wants to get out and feels he can't trust any of his kids to take the business over (Which I agree, because I've seen a owner's kids destroy more businesses than I can think of).

Anyway, we're to a point that I have to start doing some serious due diligence on the business to determine whether it's worth what he's asking (Around $1.2m). My first step was to ask for books regarding the business, which he was happy to do, but he had to get them from his accountant, the same accountant that I've left this year due to their poor quality.

I was VERY shocked to see more-or-less the entire businesses' income on a single line stating 'other income' in quickbooks. Meaning, for reporting purposes 90%+ of the income is tracked to only one category. The expenses are tracked to a much better level, but it is very worrysome to see that the accountant he is paying a substantial amount of money to each year has prepared such poor reports. On one hand, this accountant has a track record of very shoddy work, but on the other it also slightly worries me in this phase of due diligence.

So, what I'd like would be input from those of you who have bought operating, and seemingly profitable businesses of ideas and best practices to get it done. Purchasing won't be the difficult issue (At least from what I see), making sure my investment is protected is what concerns me more than anything. I've run into so many businesses that were profitable, but the owners also stripped out cash (To non report or not pay taxes) it makes the books look awful. This isn't exactly going on here, but it adds another major layer into figuring out what the truth is.
 
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G-Man

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I was VERY shocked to see more-or-less the entire businesses' income on a single line stating 'other income' in quickbooks. Meaning, for reporting purposes 90%+ of the income is tracked to only one category. The expenses are tracked to a much better level, but it is very worrysome to see that the accountant he is paying a substantial amount of money to each year has prepared such poor reports. On one hand, this accountant has a track record of very shoddy work, but on the other it also slightly worries me in this phase of due diligence.

I don't know what kind of agreement you'd need with him to do this, but I'd want to do a full audit. The one time I've seen books this bad there were expenses getting capitalized and all kinds of other nonsense that led to the company looking much more profitable than it was.

@CareCPA is probably the guy to answer this question
 

Tanishatheangel

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Sep 22, 2017
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I currently own/run a decently successful real estate rental company with a total of 71 rental units. Making great cash every month, equity and growth is pretty good.

Recently I ran into a local business that has several sources of income just at one location. The owner is older and wants to get out and feels he can't trust any of his kids to take the business over (Which I agree, because I've seen a owner's kids destroy more businesses than I can think of).

Anyway, we're to a point that I have to start doing some serious due diligence on the business to determine whether it's worth what he's asking (Around $1.2m). My first step was to ask for books regarding the business, which he was happy to do, but he had to get them from his accountant, the same accountant that I've left this year due to their poor quality.

I was VERY shocked to see more-or-less the entire businesses' income on a single line stating 'other income' in quickbooks. Meaning, for reporting purposes 90%+ of the income is tracked to only one category. The expenses are tracked to a much better level, but it is very worrysome to see that the accountant he is paying a substantial amount of money to each year has prepared such poor reports. On one hand, this accountant has a track record of very shoddy work, but on the other it also slightly worries me in this phase of due diligence.

So, what I'd like would be input from those of you who have bought operating, and seemingly profitable businesses of ideas and best practices to get it done. Purchasing won't be the difficult issue (At least from what I see), making sure my investment is protected is what concerns me more than anything. I've run into so many businesses that were profitable, but the owners also stripped out cash (To non report or not pay taxes) it makes the books look awful. This isn't exactly going on here, but it adds another major layer into figuring out what the truth is.

examine every portion of the business like a doctor would give a cancer patient a x ray be very through determine whether or not the risk is worth it and if not move on to a new idea
 

Duane

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I've bought 3 businesses, not online businesses, but they were all in the same field. On paper they looked like great deals, but after closing they were all a mess when I completely took over and it was a MASSIVE headache to recover them and cost me some extra money out of pocket to get things flowing again.

I'm no longer a fan of buying businesses unless it's an amazing deal or I see something I can modify in it that could bring huge potential.
 
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Last edited:

TheOwl8

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Dec 5, 2013
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I was VERY shocked to see more-or-less the entire businesses' income on a single line stating 'other income' in quickbooks. Meaning, for reporting purposes 90%+ of the income is tracked to only one category. The expenses are tracked to a much better level, but it is very worrysome to see that the accountant he is paying a substantial amount of money to each year has prepared such poor reports. On one hand, this accountant has a track record of very shoddy work, but on the other it also slightly worries me in this phase of due diligence.


Just because the income is booked to one account, doesn't mean it's wrong, it just means the accountant is lazy.

I would recommend you focus on the statement of cash flows, and reconcile them to see how they compare to the P&L. The accounting can be wrong, the P&L can be over or understated, but beginning cash is beginning cash and ending cash is ending cash. That is really hard to mess up.

Obviously it is also very important you also compare the books to the tax returns.

I don't know if you're buying the equity or the assets, but if you are looking to buy the equity remember any future audit of the company will fall into your liability. If the books are shoddy and the company gets audited from 2015 and you own the equity, it is now your problem. I would factor this risk into the purchase price.
 

BrandonS85

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Sep 8, 2015
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I've bought 3 businesses, not online businesses, but they were all in the same field. On paper they looked like great deals, but after closing they were all a mess when I completely took over and it was a MASSIVE headache to recover them and cost me some extra money out of pocket to get things flowing again.

I'm no longer a fan of buying businesses unless it's an amazing deal or I see something I can modify in it that could bring huge potential.

My current mindset is REQUIRING a 3month due diligence/takeover phase that would put me and a partner in the driver's seat and be able to personally overlook the financial operations of the business. Part of this deal is the seller financing part of the purchase, so in this case we only come up with part of the $1.2m to purchase the business, then the seller finances the remainder. It takes SOME of the bite out, but still not a sum of cash I want to throw away.
 

CareCPA

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I don't know what kind of agreement you'd need with him to do this, but I'd want to do a full audit. The one time I've seen books this bad there were expenses getting capitalized and all kinds of other nonsense that led to the company looking much more profitable than it was.

@CareCPA is probably the guy to answer this question
Thanks for pulling me in @G-Man

Look at the tax returns, but assume they're understating income on there. Assume they're overstating income on whatever financials they give you. Somewhere in the middle is the answer.

As mentioned previously, check cash flow. But not the cash-flow report from QB. Check the bank statements, and get them directly from the bank.
If the business is cash-heavy (as in literally, cold hard cash), it's going to be very difficult to get accurate financials. I usually give people the benefit of the doubt, but since you already know the accountant is shoddy, then they probably didn't ask for too much verification of whatever income the client told them to put on the tax return. Meaning all the physical cash probably just disappeared.

Depending on the size and complexity of the business, it may be worth paying a local firm to audit them before purchasing. No matter what, you will never have 100% confidence in the numbers, so there is always some leap of faith when you have to take someone else's word as truth.

Also, instead of owner-financing, consider an earnout. If the price is $1.2 million, maybe agree on $800k cash, and the remaining $400k if the business hits certain thresholds within a defined time period. This transfers some of the risk to the seller.
 
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Ronak

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I've bought 3 businesses, not online businesses, but they were all in the same field. On paper they looked like great deals, but after closing they were all a mess when I completely took over and it was a MASSIVE headache to recover them and cost me some extra money out of pocket to get things flowing again.

I'm no longer a fan of buying businesses unless it's an amazing deal or I see something I can modify in it that could bring huge potential.

Interesting-- Sounds like you have some hard learned lessons to share that members would love to hear, you should start a thread. Were the issues industry specific, or can the lessons be applied to any business?
 

Get Right

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I run the P/L's against industry standards (if you can separate the income streams manually). If something is way out of whack, I drill down to find out why. I personally wouldn't run from a business with bad books but I would completely understand where the $ goes. You can also have an agreement written regarding future performance/potential losses due to misinformation.
 

Duane

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Interesting-- Sounds like you have some hard learned lessons to share that members would love to hear, you should start a thread. Were the issues industry specific, or can the lessons be applied to any business?

Yeah I could start a thread, some of the information would be irrelevant to online business purchases and some of the information can be applied to any business.

If you would like to hear more, you can always pm me and I'll be happy to talk to you about it, don't want to hijack the thread.
 
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OperationMyWay

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Thanks for pulling me in @G-Man

Look at the tax returns, but assume they're understating income on there. Assume they're overstating income on whatever financials they give you. Somewhere in the middle is the answer.

As mentioned previously, check cash flow. But not the cash-flow report from QB. Check the bank statements, and get them directly from the bank.
If the business is cash-heavy (as in literally, cold hard cash), it's going to be very difficult to get accurate financials. I usually give people the benefit of the doubt, but since you already know the accountant is shoddy, then they probably didn't ask for too much verification of whatever income the client told them to put on the tax return. Meaning all the physical cash probably just disappeared.

Depending on the size and complexity of the business, it may be worth paying a local firm to audit them before purchasing. No matter what, you will never have 100% confidence in the numbers, so there is always some leap of faith when you have to take someone else's word as truth.

Also, instead of owner-financing, consider an earnout. If the price is $1.2 million, maybe agree on $800k cash, and the remaining $400k if the business hits certain thresholds within a defined time period. This transfers some of the risk to the seller.

Not that @CareCPA needs the backup as he has proven himself over and over in this forum but when I saw the thread I came here to post basically the same thing. That will get you a great start and it is where I began. Little background on me.... Former CPA who recently purchased a business in the last 6 months.

Also, to you @CareCPA ...

wewe-have-no.jpg
 

BrandonS85

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Sep 8, 2015
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Interesting-- Sounds like you have some hard learned lessons to share that members would love to hear, you should start a thread. Were the issues industry specific, or can the lessons be applied to any business?

I've got a few ongoing threads in the real estate forum here.
 

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