How to read a small business's books before you buy

Ask for three years of tax returns first, not the profit and loss. Returns are the numbers the seller has already sworn to; a spreadsheet is the number they would like to be true. Where the two disagree, the return wins and the difference is the conversation.

Then the bank statements

Twelve months of statements, matched against the returns. You are looking for takings that arrive evenly through the month rather than in the shape a real business makes, and for a December that looks like a March.

Then the add-backs

Sellers add back their own wage, one-off costs and personal expenses to reach seller's discretionary earnings. Some of those are fair. A vehicle the business genuinely needs is not an add-back, and neither is a family member on the payroll who actually does the job.

What is usually wrong

In order of frequency: staff costs understated because the owner works unpaid hours, rent about to rise at a review the seller has not mentioned, and equipment near the end of its life with no replacement budgeted. None of these are deal-breakers. All of them are price.