Obtaining financial records from a small business owner that is not incorporated
Hi Jeff great post,
I am interested in purchasing an existing franchise from a small business owner that is not incorporated so any advice on obtaining 3 years of business tax returns equivalents?
I would think revenue and costs from the franchise software that is provided would be a good place to start.
But would welcome your thoughts.
In addition – the business is breakeven with growth potential but is there a formula on how many years I should plan to make my cash investment back? A simplifying assumption I have been using is 5 years / 20% cash on cash return threshold. Them comparing the NOI assumed years 1-5 and compare to my threshold – thoughts?
Thank you so much in advance!
Thanks for the question. This sounds like a bit of an odd situation.
First, it’s hard to buy businesses that aren’t incorporated. This is because there isn’t really anything to buy – the business doesn’t really exist. Any assets of the business will be owned in the proprietor’s name. You may want to consider having the seller incorporate and assign all the assets before moving forward with a purchase.
As far as financials, because this business isn’t incorporated it will be very difficult to recreate dedicated financials for the business as a standalone entity. You’re almost forced to take the seller’s word that the financials are as represented. If the seller is amenable, you may consider hiring an accounting firm to go back and recreate some financials for the business so you have a better idea of ongoing cash flow and enterprise value.
If this business is breakeven (inclusive of owner compensation) then there wouldn’t really be a breakeven period. You mention that the business has “growth potential” and you would need to objectively consider the likelihood of that growth when building revenue forecasts. These forecasts are what you would use to determine your breakeven period. However, there really isn’t an assumption that you can make for annual return given that, based on the company’s current financial state, it’s only breaking even.
If you have more questions or are wondering whether you may want to reconsider this purchase, be sure to check out our article on Questions to Ask When Buying a Business (https://fitsmallbusiness.com/questions-ask-buying-business/). You may also find some insight in our How to Buy a Business Article (https://fitsmallbusiness.com/how-to-buy-a-business/). This second piece details the process to go through and what experts to engage when buying a business.
Hope this helps,