I’m buying a business. Which financial statements should I look at?

A business should have Profit and Loss Statements (P&L), and it should also have balance sheets for the end of each of its fiscal years. Most buyers will focus on the P&L Statement as a reflection of the cash flow and benefits received by the owners of a business. However, you should also look at the balance sheets of the business, as well as other statements of cash flow and changes in shareholder equity. When looking at the balance sheet, it’s important to understand that the balance sheet consists of a list of assets and then a list of liabilities. If you take the total assets of the business and deduct the liabilities, you arrive at the owner’s net worth in the business.

These other statements help you determine whether or not the operation of the business is being financed by the owner or if it has a substantial portion of debt. The purpose of looking at and comparing all of these financial statements is to determine whether or not each of the financial statements is accurate. If they don’t match up, then you’re able to see that there is a problem either because the records haven’t been kept properly or because the owner is trying to hide something.

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