3 Accounting Issues You Should Evaluate Before Buying a Business

20 December 2017
 Categories: , Blog


Financial records can help you determine the financial health of a business that you wish to buy. It is, therefore, necessary to get a qualified accountant to evaluate these records and help you make the best decision. Below are some of the issues a qualified accountant will help you evaluate.

Fair value determination

One of the potential pitfalls in determining the health of a business that you wish to buy is understanding how they obtained the present value. Some businesses consider the price at which the assets were bought. Others use the price at which its assets can be sold at that time. This is called the fair market value. However, this current value of the assets is subject to debate because an element of subjectivity is introduced into the accounting matrix. It is therefore important for you to perform an independent assessment of what those assets are worth instead of relying on the fair market value indicated in the books of accounts.

Revenue recognition issues

Modern businesses are so complex that it can be hard to determine the expected revenues from these businesses. For example, a company that sells software may not easily know how much it earned from a sale until all the costs of updating the software have been deducted. Thus, the tendency is to estimate or project what the anticipated returns on sales will be. Those estimates may turn out to be lower or higher than expected. It is important for you to find out how reliable the accounting method that was used to arrive at those estimates is. You can even adjust those figures so that you make a decision based on revenue projections that seem accurate to you.

Universal standards used

Financial reporting is usually based on one of two international standards (GAAP or IFRS). The outcomes for the same company can vary widely if the same accounting firm applies the two standards to prepare two sets of financial records. It is therefore wise to request for financial records that were prepared using the accounting standards that you are familiar with so that you can make an accurate judgment about the suitability of purchasing that company at a price requested by the seller.

The best way to navigate through all those complications is by having an experienced accounting professional by your side. The expert will help you to understand all the financial reporting documents so that you don't make a mistake during the negotiations for the purchase of the business.