The firstissue is can you believe the financial reports you are given? At least construct your own set of
accounts from the facts you are confident of and the averages for your industry. These averages may be
available from your professional association. Graham Long also has access to this information for hundreds
of industries. The averages together with the figures supplied by the seller should give you a contrast from
which to draw some conclusions about the business’ profitability.

Most of the industry averages information you receive will be presented as a percentage of sales so it is very
important that you get the expected sales as accurate as possible. This isn’t as hard as you think if you have
the dedication. You only have to spend a lot of time watching the business to work this out. Hopefully, seller
will allow you enough hands on involvement in the business but if not, stalk the business. You may feel
strange staking out the place but what does this matter when making such a life style altering decision? I
persuaded one client, who was determined to buy a business to sit and watch it for a day. That was all it took
to change his mind.
You need to work with figures you feel confident with. Then work out your break even point, the amount of
working capital you will need to carry the business and do some what if analysis on the profit forecast. When
working out the capital you will need to carry the business also do some what if analysis on bad debts and
slow payers.
A CD with two very simplified excel spread sheets is enclosed in the folder. These can be used as a basis to
analyse the profit and the working capital required. The trick when developing these is to put your
assumptions into cells that are linked to the other figures. This allows you to do what if analysis. For example,
in the cash flow look what happens when you change the 30 day accounts from 75% of sales to 60% with the
other 15% moving to 90 days. The profitability flow chart is based on a motel look what happens if the
occupancy rate changes from 75% to 60%, which Graham will tell you is the industry average. Then what
happens if the occupancy rate is really only 60% and interest rates go up 1%. Not too bad, is it, so that is not
really your problem occupancy is the main issue. If you can take the time to build an interactive spreadsheet with figures you have confidence in you will really start to understand what you are getting yourself into.