A buyer sees a profit figure, but not yet the business behind it
This is an illustrative composite client situation. It does not describe one identifiable buyer, seller or transaction, and it does not represent a result achieved by Pillar.
A prospective buyer received a sales pack for an owner-managed New Zealand business. The pack included recent financial statements and a profit figure used to support the asking price. The buyer liked the industry and could see a route to growth, but had not received the underlying ledger, tax records or a clear list of what the proposed sale included.
The first question was: “The accounts show a profit. Is that enough to make an offer?”
It is enough to begin a review. It is not enough to decide what the business earns for a new owner, what cash it will need, what is being acquired or what it may be worth. Those questions require a defined transaction and a record trail that lets the accountant test the seller’s claims instead of repeating them.
Define the proposed purchase before testing the numbers
The buyer should first record what the seller is offering. An asset purchase, a share purchase and the purchase of one division are different subjects. The financial records may cover a legal entity that owns more or less than the operation being advertised.
Business.govt.nz describes due diligence as checking a business’s assets, liabilities and commercial potential. Its guidance also points buyers to contracts, staff, customer and supplier dependence, stock, debts and the basis for forecasts. The lawyer should confirm the legal purchase perimeter and the conditions in any offer. The accountant can then match the financial review to that perimeter.
For a company, the Companies Register can show public company details, directors, shareholdings and filed documents. A register search is one source, not a substitute for the company’s own share register, contracts, asset records or legal review.
Rebuild the reported profit from supporting records
Start with the accounting period behind the headline figure. Confirm whether it comes from signed annual financial statements, management accounts, a forecast or a seller-prepared adjustment schedule. The opening and closing dates, accounting basis and entity need to be consistent.
The review can then trace material revenue and expenses to the general ledger and source records. Sales reports, bank activity, GST returns and income tax returns can help test whether the periods and totals tell a coherent story. They do not replace one another. A difference may have a valid timing or classification explanation, or it may show that further work is needed.
Inland Revenue’s Smart business guide lists invoices, bank statements, wage records, ledgers, debtor and creditor lists, stocktake figures, fixed-asset records, financial statements and sale agreements among the records a business may need. For a buyer, the useful question is whether the seller’s profit can be followed through those records without unexplained gaps.
Any proposed adjustment should be listed separately. Owner remuneration, related-party charges, personal items, one-off income or costs, unusual repairs and revenue that may not recur all need an explanation. The review should show the recorded result, each adjustment, its evidence and the assumption being made. It should not assume that an adjustment will be accepted by a lender, valuer or buyer merely because it appears in the sales pack.
Profit does not show the cash needed after settlement
A buyer also needs to understand the balance sheet and the first months of ownership. Business.govt.nz explains that a balance sheet shows assets, liabilities and equity at a point in time. Receivables, stock, payables, tax, employee leave, loans and customer deposits can all affect the cash available or required after settlement.
The buyer should ask which working-capital balances are included in the proposed deal and which remain with the seller. A profitable business may still need cash for payroll, stock, tax and suppliers before customers pay. Equipment may need replacement soon after settlement. Loan repayments and owner drawings do not appear in operating profit in the same way as ordinary expenses.
Prepare a short post-settlement cash view using dated assumptions for customer receipts, supplier payments, wages, tax, debt service, essential repairs and capital spending. This does not predict whether the acquisition will succeed. It shows which cash needs sit outside the profit figure and which assumptions require evidence.
Connect the financial review to what makes the business trade
Numbers from past periods only help if the conditions behind them can continue. Identify revenue by customer, product or service where the records allow it. Note customer concentration, expiring contracts, supplier dependence, key staff, licences, leases, software and the work currently performed by the owner.
The accountant can test the financial history, working capital, forecasts and proposed adjustments. A lawyer should review sale terms, contracts, ownership, employment matters, disputes and legal obligations. Industry, technology or property specialists may be needed where the records raise questions outside either adviser’s scope.
None of those checks makes the decision for the buyer. The buyer still has to decide whether the opportunity, risks, price, funding and transition fit their plans.
What to bring to the first buyer-side review
Bring the sales memorandum, proposed heads of agreement or offer, an exact list of the assets or shares under consideration, and every financial period supplied by the seller. Add tax returns, GST summaries, bank or sales evidence, aged receivables and payables, stock and fixed-asset records, debt schedules, budgets, forecasts and any adjustment schedule that has been provided.
Also list what has not been supplied, what the seller says will transfer, and what appears to depend on the current owner. Mark documents that remain subject to confidentiality restrictions. Do not send confidential seller, customer or employee files through the website enquiry form.
Pillar’s business valuation and transaction support can help define buyer-side financial due diligence and valuation scope. The business advisory service may be relevant when working capital, forecasts or owner dependence need to be tested. To have a Pillar accountant review the available information and confirm the next scope, use the published phone details or contact Pillar.