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January 6, 2024
Unlocking insights for informed acquisition-making.
Buying a company can be an excellent strategy for an aspiring entrepreneur to own their own business without starting from scratch.
But how can you ensure you invest your money into the right business venture? Carefully evaluate the selling business’s sustainability and financial health before sealing the deal.
This report depicts a company’s financial performance through revenue, expenses, and net profit.
Typically, when buying a startup, you should ask for the latest P&L statement (no older than 180 days) to ensure you’re reviewing the most recent financial history.
A cash flow statement is one of the most critical financial reports used to assess a company’s finances while buying. This report can demonstrate the selling firm’s ability to operate in the short and long term based on its generation and use of cash during the accounting period.
A balance sheet summarizes a business at a given point in time. It’s a snapshot of a company’s financial position, broken into assets, liabilities, and equity.
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A company issues this financial document as part of its balance sheet. It reports the changes in the equity held by shareholders, whether those shareholders are public or private investors.
The MD&A accompanies a company’s financial reports. This document provides an overview of the firm’s past performance, current financial condition, and management’s future projections. It also includes a discussion of the firm’s compliance, risks, and plans, such as goals and new projects.
Although not a financial document, it offers additional context about why the selling company performed the way it did during the reporting period, aiding investors in assessing its financial health.
Request the past three to five years of tax returns from the seller.
These documents will provide important information about the selling company, including its date of formation, business address, the compensation of its officers, accounting method, and any assets and liabilities.
Deciding to buy a company is no simple matter. By analyzing the financial documents above, you will better understand the selling business’s historical performance, current financial health, and potential future outlook. These insights will aid in making an informed decision about the acquisition, assessing risks, and aligning your strategic goals with the firm’s financial trajectory.
Want to know more about startups and what it takes to get started? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.
Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.
Accounting & Finance
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