Received this question today from a reader who is thinking of
buying a business from an owner who has only owned the business for one year.
Here is his question: "I HAVE A BUSINESS I AM VERY INTERESTED IT. IT IS A PERFECT FIT FOR MY WIFE AND ME. PROBLEM IS THE PERSON WHO IS SELLING IT IS ONLY THERE ONE YEAR. THE OWNERS BEFORE HAD BEEN THERE SEVEN YEARS. I CAN ONLY GET LESS THAN WELL KEPT BOOKS FROM THE ONE YEAR OF THE PRESENT OWNER. HE IS NOT GIVING UP ANYTHING FROM PREVIOUS OWNER. SHOWING VERY LITTLE IN PROFIT ON P&L BUT HE TELLS ME HE GETS MONEY FROM PERKS THOUGH I HAVE YET TO SEE THE PERKS LISTED. SHOULD I BE WORRIED. CAN SOMEONE CULL SOMETHING ABOUT THE VALUE SO I CAN MAKE AN OFFER - WITH ONLY ONE YEAR OR LESS BOOKS AND OTHER INFO TO GO ON? IS THERE A WAY I CAN GET OTHER INFO FROM PREVIOUS OWNER? IS SOME OF THIS PUBLIC? "
First and foremost there should be records (tax returns, financials, bank statements) from the previous owner that were given to the present owner when they purchased the business. If not (or the owner is not willing to share) all you can do is judge the business on its current one year track record. Business sellers who put up obstacles like this usually don't end up selling.
As you say, you should "be worried" that they can't prove what they claim they are earning. There are no "public records" for privately held businesses that would determine the financial health of this business. Press this owner hard for the "books and records" from the previous owner, and if they can't produce them I would seriously consider advising you not to
purchase this business.
Also if you do decide to move forward on this deal have a competent CPA provide you with some intensive due-diligence to verify the limited information that is provided to you from the current owner!
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