However, if a seller is forthcoming with this information, it can signal to the buyer that he or she has nothing to hide. It is a good idea for the buyer to hire an accountant to assist in this financial analysis. This will help determine whether the deal meets the buyer’s investment requirements. Buyers also should consider hiring other specialists to work with contracts, unemployment compensation, insurance, and banking. Small Business Development Centers (SBDC) throughout the country offer free consulting services to businesses with fewer than 500 employees.
The buyers also should complete at least a rough market and competition survey before performing a financial evaluation. This will ensure the buyer’s familiarity with the shop’s location and will help when estimating future revenues and expenses. If the buyer is unfamiliar with the area, an independent consulting service can be hired to provide a useful survey. A seller expects a written offer with price, terms, conditions, and an earnest money deposit before allowing a potential buyer to review confidential financial information. It must be agreed that the buyer can withdraw if he or she is unhappy with the financial records. This is because the earnest deposit is at risk unless the right to retract the offer is in place. When reviewing the seller’s financial records, the buyer should expect that an independent CPA has never audited them.
Auditing is a costly process, and most small coffee and tea shops do not do it unless they absolutely have to. A lucky buyer is one who is given audited financial statements. Buyers need to reconstruct historical financial statements to show what they could have been, had the buyer been operating the business. This is usually done from only the previous year’s statement. Patience is important here; this is a time-consuming process. If errors are made, the estimate of the business’ sales price may be inaccurate. Sellers will tend to overestimate customer counts and check averages and underestimate utilities and other expenses. The inexperienced buyer should be wary when evaluating these numbers and may want to hire professional counsel.
Also, it is important to be aware that sellers usually will include only the financial details they initially want to reveal. Buyers should evaluate this information carefully, with special attention to the apparent net cash flow, before spending a lot of time and money on detailed analysis. During this analysis, it is important to note that the typical beverage outlet purchase will not appear to generate enough money to provide sufficient cash flow, give the buyer an appropriate salary and ensure a return on the initial investment. Do not be put off too quickly, however. Solid analysis often reveals that a change in ownership can enhance an operation’s profitability considerably. This analysis should examine all relevant tax filings to determine the most likely annual sales volume that the shop will generate.
The profit figures included in these filings will be used to determine an accurate sales price. Personnel records are crucial in determining if there have been any Department of Labor judgments against the current owner, or if there are any pending judgments that could impede the transfer of ownership. It is a good idea to meet with a Department of Labor representative to find out if the shop is currently under investigation. Cost of equipment, beverages, food, and miscellaneous supplies are a specialty beverage business’s biggest expenses.
The potential buyer should take a random sample of cancelled invoices and check their consistency with the cost of goods sold and direct operating supplies expenses listed on the current income statement. Cancelled invoices are a good test of the current owner’s purchasing skills. Potential buyers also should analyze balance sheets and income statements carefully. Balance sheets can reveal the anxiety level of a seller. As a buyer, it is important that you keep in mind that you are basing your price on current income, but purchasing the operation’s future revenue-making ability; this is one of the most critical tasks the buyer will perform.
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