Can someone help interpret these figures for Me?

[Mamaof3]

Ok so i'm looking at the financials of a business but am very very new to the whole commercial business side of things and don't really know how to interpret these figures, what they mean and how much actually is profit....

Can anyone help explain the figures for me pretty please with a cherry on top

 

[Mamaof3]

oh forgot to mention that its in the hospitality industry...sorta like a cafe in case that makes a difference?

 

[Peter_Tersteeg]

I'd suggest you get a copy of the tax returns, profit & loss and balance sheet for at least the last 2 years (preferably 3). Then take them to an accountant to help interpret them.

I'd also ask some questions as to why the income and sales have been dropping for the last 3 years.

What do they mean by 'Owner Discretionary Add Backs'?

This statement doesn't really tell you much at all and is compeletly unverificable.

 

[Marty McDonald]

Hi,

I am not an accountant...but here goes.

The top table call it table 1, shows the businesses net income or the pre tax business profit. ie the profit that the business would pay tax on. Or put another way the sales turnover less all operating expenses for each of the last 3 years.

The second table, call it table 2 shows all the expenses included in the operating expense figures in table 1 which the seller is saying are actually discretionary expenses so actually form part of the overall business profitability picture ie. owners wages dont have to be paid, cleaners don't need to be used and interest is an expense that the current owners have that a new buyer may not.

The seller is trying to show the true picture of the business for the buyer ie. for 2010
profit of $32,985 + wages $65,000 + owners super $2700 etc = $132,528 in total..

The turnover figure reducing is a bit of a worry IMO.

 

[Aaron_C]

You have to add back the owner's drawings/wages, depreciation, interest payments etc because these aren't 'business cashflows' - they are just tax items.

That way you can get the true earnings of the business and base a valuation on that figure instead.

 

[Mamaof3]

Thanks for that Marty. Off to have anotehr closer look at it to see it it makes better sense now

 

[Mamaof3]

Aaron, sorry a question, so the owners salary/wages....is this just 'on paper for tax purposes and the Owner wouldn't physically be getting money in his pocket for wages each week?

I guess this is important to Me because if what the owner actually gets in his pocket each year is $32,985, i wouldn't even bother looking at it.

 

[Aaron_C]

Aaron, sorry a question, so the owners salary/wages....is this just 'on paper for tax purposes and the Owner wouldn't physically be getting money in his pocket for wages each week?

I guess this is important to Me because if what the owner actually gets in his pocket each year is $32,985, i wouldn't even bother looking at it.

Sorry I wasn't exactly clear. The owner's wages and drawings are paid to him out of the business profits. Therefore you need to add that back to the operating profit to get the true operating profit of the business. So it's not an 'on paper' transaction - it actually occurs. But it has to be added back to give a clearer picture of how profitable the business actually is.

 

[Mamaof3]

ahh i see...that makes sense. Ta

 

[alexlee]

My observations:

gross profit (cost of sales / sales): 2008: 24%, 2009: 23%, 2010: 25%, but sales have been falling.

Operating expenses dropped 17% compared to fall in sales of 13% from 2009 to 2010. Why?

Owner's salary was cut by 15k, and the net profit was 2k lower. So what goes to the owner has fallen by 17k.

Interest dropped 13k from 2009 to 2010. This skews the number as it reflects how the current owner is financing the business, not how you will finance the business.

Along the same lines, why did the cleaner fee just drop by 1/3?

I'm ignoring the fact that this is just the owner's word and you'll need to verify these figures.

 

[Bird Dog]

I'm ignoring the fact that this is just the owner's word and you'll need to verify these figures.

All above have provided you with some great feedback Mama but Alex's last comment is by far the most relevant!
Without the actual documents, this info could be completely fictitious and is therefore useless. Unless you have the legal tax documents to support it, I wouldn't even consider the attached..

To be brutally honest, given the intent of how you started the post, I would suggest you pay an accountant for an hour of his/her time to look over the documents. It sounds like you're not entirely sure at what you're looking at which means anyone of questionable integrity could quit easily ply you with false information that you would not be aware of.

Good luck

B.D

 

[Mamaof3]

I totally agree Bird Dog. I was just trying to understand the figures myself initially and if from that it looks ok my intention was to give it (alongside the other supporting docs) to our Accountant to assess.

The actual PDF that i attached to my original post looks a little dodgey but only because i had to blank out a few things (header, business logo etc) as there was a confidentiality agreement about keeping the business and its details anonymous.

I do have all their tax documentation now so if we think its worth pursuing we'll get the accountant to go through it with us.

thanks everyone for clearing everything up! much appreciated

 

[Hulkster]

I wouldn't put my faith in the accountant in this situation unless they have everything they need to make an assessment.

You need to see
BAS Statements showing 600k in income and 550k in expenses
Bank Statements that show circa 600k per annum going in
Statements from major suppliers

It's easy to "cook the books" in a small business, particularly if you plan to sell.

You cannot hide a lack of income however. You can hide invoices, but you can't hide the outgoing or statement line entries.

 

[Aaron_C]

Nothing beats going to the actual shop/business itself and seeing how many customers they have in a week to estimate takings....

 

[Mamaof3]

Very valid point Hulkster. No-one can verify those figures provided except if i see their bank statements and BAS's.

Thanks for the reminder!

 

[lawsjs]

1) Goodwill is worthless.
2) If you are buying a business do not believe any figures. If you are capable of making it work (yourself) I would suggest you wouldn't be asking these questions as you would know.
3) If you are buying a property and are leasing to this business - how easy is it to lease to someone else?
5) You look for Accountant advice only if you are looking for a reason to say 'no'.
6) Unless you are in position (2) or (3) and suitably confident - it will be a great learning experience but will cost you a fortune.

 

[Aaron_C]

1) Goodwill is worthless.
2) If you are buying a business do not believe any figures. If you are capable of making it work (yourself) I would suggest you wouldn't be asking these questions as you would know.
3) If you are buying a property and are leasing to this business - how easy is it to lease to someone else?
5) You look for Accountant advice only if you are looking for a reason to say 'no'.
6) Unless you are in position (2) or (3) and suitably confident - it will be a great learning experience but will cost you a fortune.

Goodwill is not worthless. Banks lend on Independent Supermarket Goodwill all the time. It just depends on what business it is. McDonalds, for instance, goodwill is worth millions

 

[lawsjs]

I will come to you with bells on when I sell my next business! Fortunately for me, there are people silly enough to pay for 'goodwill'....

As an aside, I hadn't realised those figures were for a major franchise outlet. The word 'cafe' and the lack of anything that looked like profit suggested otherwise to me I can put you immediately into a real restaurant (east sub Syd) with a very recent $500k fitout for $200k if anyone wants a food outlet. And it is a partnership breakup that has caused the sale before you ask.

Much like SME's boasting about 'turnover' and not profit, goodwill is something that is mostly sold by the wise and paid for by fools.

A good cafe operator I know buys cafes on a body weight formula. When the owner has obviously lost a lot of weight, she then gently starts negotiating to buy. Of course, she pays cash so has no need of a financier to help her pay more than she has to.

 

[lawsjs]

A comment on a recent goodwill purchase from the big end of town....

As recently as late 2010, Bank of America still clung to the position that none of the $4.4 billion of goodwill from its 2008 purchase of Countrywide Financial Corp. had lost a dollar of value. Chief Executive Officer Brian Moynihan also was telling investors the bank would boost its penny-a-share quarterly dividend “as fast as we can” and that he didn’t “see anything that would stop us.” Both notions proved to be nonsense.

The goodwill from Countrywide, one of the most disastrous corporate acquisitions in U.S. history, now has been written off entirely, via impairment charges that were long overdue. And, thankfully, Bank of America’s regulators in March rejected the company’s dividend plans, in an outburst of common sense.

 

[Aaron_C]

I will come to you with bells on when I sell my next business! Fortunately for me, there are people silly enough to pay for 'goodwill'....

I don't think it is accurate to assume that paying for goodwill is a fool's game. Sure, it's better not to pay for it - but at the end of the day if you want to purchase cashflow then you have to pay more than SAV for a good business. It depends on whether you can make it work for yourself.