Business Tax Returns & Financials

How To Ask For Financials & Other Documents When You Buy A Business?

By Josh Foo Feb 23, 2018

One of the frequent early requests from Buyers is the demand for a large volume of business documents from the annual Profit & Loss Statements, Balance Sheets, Goods & Services Tax (GST) Business Activity Statements (BAS), Sales Report to the Franchise Turnover Report.

But if there is no relationship between the Buyer and the Seller, why would the Seller bare everything about their business to a complete stranger, even if the business is for sale?

This is true of any business.  If the National Australia Bank was for sale tomorrow, would you be able to demand their complete customer client list, major transactions in the last 12 months, legal correspondence, asset registers and what not?  I don’t think so.  The first question they would ask is – who are you?   They would have to ascertain first that you are a legit buyer.

With smaller businesses, the rationale is the same with a few nuances.

Firstly, small businesses often have a large cash component.  For example, restaurants, trade services and retail shops collect a huge quantity of cash that is often not declared in their official tax reporting (otherwise known as the black economy).

Furthermore, some businesses are too busy to fully comply with the zillion regulations in Australia such as policing international students on keeping with their visa restrictions, ensuring Occupational, Health & Safety requirements at work, etc.  And the last thing they want is to give away incriminating evidenceabout possible breaches in their business that Government investigators can use against them.

Many Business Owners are fearful of ATO auditors masquerading as Buyers.  So Business Owners are not suddenly going to handover these potentially incriminating confidential documents without some checks first.

Next, small Business Owners are extremely busy because they are involved in every aspect of the business.  This is just the reality of small businesses.  When a Buyer asks for a variety of documents, Business Owners may have to contact their accountants and solicitors to get these reports ready.  This could take months.

I once knew of a business that was 10 quarters (30 months) behind in their Goods And Services Tax BAS reporting to the ATO.

Unfortunately, this is not the exception, but the norm.   The Owner may not take serious action to prepare these documents unless they know that the Buyer is serious, genuine and legitimate.    If they have not met the Buyer, they may delegate this request to the bottom of their things-to-do list or worse, the request is simply ignored.

Thirdly, some Business Owners may control multiple businesses and have complex tax structure. For example, they may own Business A, Business B and Business C together under the same Australian Business Number (ABN).  And the legal owner of the ABN is a family trust.  And the multiple trustees are comprised of yet separate companies controlled by different members of the family.  It can get awfully complicated.  In this instance, Business Owners are wary to give Buyers unedited financial documents because it would disclose other confidential interests outside of the business for sale.

Even if the Buyer is able to obtain a copy of these documents, it wouldn’t make much sense to the Buyer as the data is likely to be aggregated and not specificto the business.  The Business Owners would likely request an opportunity to meet with the Buyer to firstly satisfy themselves that the Buyer is genuine and legitimate, and secondly to explain and interpret the supporting documents to the Buyer.

Another legitimate concern for Business Owner is competitors.  For some niche industries,  Business Owners are fearful that their competitors will pose as Buyers to ‘steal’ their business secrets, poach employees and unethically obtain intellectual property.   Hence some Business Owner would feel compelled to first ‘interview‘ the Buyer to ensure they are not competitors.

Finally, the simplest of reasons why Business Owners do not respond quickly to requests for business financials, tax returns, ATO documents, lease contracts and the many different variant of information demanded by Buyers is because they are too busy.

They simply don’t have the time for a Buyer that has not earned their trust yet so their precious time is better spent elsewhere first (e.g. quality time with family)

Some Buyers rationalise that Business Owners should provide these documents freely and quickly if they are motivated to sell.

Don’t assume that all Business Owners are equally motivated to sell.  Many vendors are only moderately motivated.  Some are only mildly motivated.  Afterall, if a business is making seriously good money, then this would limit and counter the motivation to sell.

In any event, the fear of a Government auditor of any kind posing as a Buyer is enough to spook the owner from taking shortcuts to filter the buyer.

As a Buyer, you should also be concerned about ultra-motivated Business Owners.  This could mean (but not always) serious problems with the business, such as endemic losses or business creditors that they are hiding from Buyers.

Meeting The Owner Is The Surest Way

For Buyers, the fastest way to procure any business documents is to meetwith the Business Owner.

A meeting creates trust and rapport.  If the meeting goes well, then the Owner should be more comfortable in furnishing the requested documents quickly if the Owner is satisfied that the Buyer is serious.  Even if the Owner is unable to provide the documents, he/she can explain in person so that the trust stays intact.

Conversely the Buyer is also able to tell if the Owner is trustworthy and honest.  If the Owner is evasive about questions and there are questions over the Owner’s integrity, then the Buyer can choose not to proceed further and thus save time.

Some Buyers see buying a business like the latest LCD television set.  They prefer to compare the numbers side-by-side, tick (or not tick) the boxes and shortlist businesses before they are willing to meet with the Owners.  They are met with frustration when Business Owners do not give them the necessary documents or data for comparison.

From my experience, when it comes to buying a business, the path of least resistance and the easiest way to get from point A to point B for all parties concerned is a meeting. *

Note:  Josh is unable to provide due diligence advice for prospective buyers of businesses managed by his agency.  For consultation on new start ups or an independent review of other businesses, please contact Josh directly.

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