How Much Error Should a Buyer Expect from a Business Seller’s Financial Reports?

A business buyer who owns a business in Mexico was telling me about the corruption in government and business. This buyer had due diligence done on a gift business in Chula Vista and found that the reported profit was 15% different than reported. The buyer was of course disappointed but he also was mad and upset. Upon my suggestion he is now continuing negotiations, based on the new numbers. His comment to me was, "California business owners are more corrupt then Mexican politicians." He then asked a fascinating question. "What is the normal level of corruption one should expect and when is it an abnormal level of corruption?"

It is very rare that financial records provided are within 10% of what was reported.

If gross income and profit are within 30% of what was reported, I consider the error is within a normal range. If it were off more than 30% then we would say that this is an abnormal amount and the business should be walk away from.

When ordering financial reviews or due diligence, expect to find variations from what was reported, and do not let this reduce your interest level, in the business, just your price.

Many business buyers spend two years or more looking for the right business for them. Do not get frustrated and quit. Just be aware that you have to kiss a lot of frogs before you find a prince.


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