Understanding Tax Returns/Income

COJOE

I am looking at buying an existing business and have seen balance sheet and income statements.  I of course will be seeing tax returns soon, but what is the best way to truly understand what type of "income" the current owner is pulling out of the business on an annual basis.  They are showing little net income and some owners salaries, but not close to the metrics which are considered industry average.

vwebworld

The owner can get funds out of the business in a number of ways, depending upon the structure of the business (sole-proprietor, partnership, corporation, etc) his/her income may be easy to determine. For example if it is a corporation owner`s salary will be on a W-2 issued by the corporation whereas if it is a sole-proprietorship, the net income/loss is taxable to the owner.
 
The owner could get "income" out of the business by receiving rental payments for facilities he/she leases to the business. Or interest on money loaned to the business. There may be some liabilities (on the balance sheet) that are due to the owner. There may be funding to a retirement plan for the owner, etc.
 
In order to determine if the purchase will work for you, you`ll need to use the business income statement and make a projected income statement including any changes in income and expenses you foresee.
 
~Roland
vwebworld8/26/2008 1:36 AM

daleyfla99

Definitely seek a qualified accountant`s input in the due diligence process.  Do you live near the business?  Go check it out.  Ask for the bank statements for the last 3 months.  If it is a franchise, I will tell you not to rely on the financial statements.  Also examine your local business climate, where the business will go and where and how you will change/improve/increase the business.  If the answers to this are not readily apparent, watch yourself.  Also, why is the owner selling?  Verify this reason as best you can.  As you can tell, I do advisory work on this subject in my M&A business.  Also take a hard look a the location/lease situation.  If you do not live in the town where the business is located, get off your duff and get there.  I cannot emphasize how important your due diligence will be to your future.  The tax returns will give you an accurate picture of last year, but this is 9 months into THIS year.  Think carefully.