How do you know if a business has good books?

I was asked by a buyer, last week, "How do you know if a business has good books?" That is a wonderful question. It reminds me of the story of the President of the US. (Not this President exclusively but all Presidents), "How do you know when the President is lying?——His lips are moving." With that question answered we can go on to the next question, "How can you tell to what the degree of accuracy the books, the business financial records, are?" This is not an easy a question to answer for those of us who have received a degree in accounting, graduated from Sherlock Holmes PI School and spent 20 years looking at small business financial statements, but I will try anyway.

The first thing you look at is to see if all the primary expenses been accounted for on the financials that are given to you (Payroll, rent, payroll taxes, cost of merchandise sold, etc.). Do they appear reasonable? If you are not sure, assume they are not and make the seller document each one of them. Does the seller tell you there is cash not on the books? If yes, you know the books are a long way from accurate and get a professional before taking any further steps.

When I was giving a talk to fifty-five business brokers about due diligence, I made a comment "70% of all sellers lie." I picked the number out of my head, but the room reacted in unison by responding, "You're wrong Willard, it is 100%".

Just remember, "A fool and his money are soon parted."

Willard Michlin is a CPA, and offers assistance in the key areas involved in the buying of a business: Due Diligence and Business valuation. He is an experienced, honest and trustworthy consultant. He has published many articles and is in demand as a public speaker in the Southern California business community. You can write to Willard at info@evaluateabusiness.com and he will always answer your questions. He can also be contacted at his Ventura County, California office by calling 800-864-0420. See other articles and information about his services at: http://www.businessbuyingservices.com