Red flag library
10 red flags for Financials.
Financials
10 red flags
Declining revenue or profit
Falling sales or profit mean the business you take over is likely to earn less than its history suggests. Listings often price in the better years.
Severity: price it inAll business modelsLarge or undocumented add-backs
Add-backs raise the earnings a price is based on. When they are large, vague or unsupported, much of the asking price rests on claims rather than records.
Severity: price it inAll business modelsTax returns that do not match the accounts
When the profit in the tax returns cannot be reconciled to the profit in the accounts, you cannot tell which figures to trust, and there may be tax owed.
Severity: deal breakerAll business modelsUnrecorded cash sales
A seller who says the business takes more cash than the books show is asking you to pay for income nobody can verify, and may be passing on a tax problem.
Severity: price it inRetail, Hospitality, Agency or services, Construction, Healthcare, OtherOne-off revenue inside the last 12 months
A contract, windfall or spike that will not repeat can sit inside the last 12 months and be priced as if it will. Take it out before you value the business.
Severity: price it inAll business modelsMargins far above industry norms
Profit margins well above similar businesses can reflect a real advantage, but more often costs are missing, have been moved elsewhere or have not been paid yet.
Severity: price it inAll business modelsAgeing or written-down stock
Stock that has sat unsold is often worth less than its recorded cost. If you pay cost for it you overpay, and past profit may have been overstated.
Severity: price it inEcommerce, Retail, Distribution, ManufacturingPayables stretched ahead of a sale
Paying suppliers late before a sale builds up cash the seller can take out and leaves you to pay the bills. A working capital adjustment usually fixes it.
Severity: fixableAll business modelsRelated-party transactions
Deals between the business and its owner, their family or their other companies may not be at market rates, and many will not survive the sale.
Severity: price it inAll business modelsDeferred maintenance or capital spend
An owner who stops repairing and replacing equipment before a sale makes profit look higher and leaves you with the catch-up bill.
Severity: price it inManufacturing, Logistics, Hospitality, Construction, Healthcare, Retail, Distribution, Other