Business Audits, Evaluations, & Profitability Analysis
Business audits and evaluations are necessary when you consider buying a business. This is done in order to see what the seller did not disclose. It is not to find out if he did not disclose something. What are the types of business audits and evaluations and when would you use them?
A business analysis should be done first. It tells you the long term viability of the business. It answers questions like is the industry shrinking? Is this company becoming antiquated because China or India now produce the same parts for a quarter of the price? Is the management team inept or worse, stupid? Almost all appraisers only use the financials to set the value. The price for the company must be based on how viable the business is. Will it survive in this and the future economic condition? Does it have some uniqueness to it that will assist it to compete successfully? Financials are a representation of the past and only give a possible indication of the future. You need much more information then this. Do this analysis before you spend a lot of money on a financial audit of the books. Why buy a profitable business if its life expectancy is two years due to outside influences?
A profitability analysis is an important tool that should be used when buying a business. It tells you the probability of a company continuing to make a profit in the future economy. If a business is here today is not an indication that it will be here tomorrow. Remember that there is a reason a seller wants out, and it is definitely not the reason he is disclosing.
A financial audit will go into the books in great detail to verify and cross check all the data. It will find any honest errors and any questionable entries. This will result in a corrected profit and loss statement. With knowing the real profit of the company, you can set a sensible price on the business and not spend more than you should.
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