Updated: Dec 7, 2020
When a buyer considers the purchase of a company, the most important aspect is the financial health of the company as shown on the P&L and Balance Sheet as well as the tax returns.
While the profitability is important, an astute buyer will want to analyze the elements of the cost of goods sold, the gross profit margins and detailed overhead expenses in order to gain additional clarity.
Historical financials (past 3-5 years) are important because they show variability, growth, improvements, etc. Projections show what the seller thinks that the company will look like in the future and what the buyer might expect if he/she buys the company.
Ideally, a company’s internal financial reports are reviewed annually by the firm’s CPA who at least issues “Compiled Financials”. A more thorough review by a CPA will result in “Reviewed Financials”. In both cases, the Tax Returns will closely mirror the internal financials
Depending upon the type of company, accounting for the inventory is also important as one element of a balance sheet.
Bottom Line: Buyers always start out a little skeptical about internal company financials. However, if presented with CPA reviewed financials, they breathe a sigh of relief and move on to asking questions about the attributes of the company. If, however they are presented with substandard internal financials, they immediate want to dig further.