If you’re in the process of buying a business, you’ve likely been presented with the company’s Notice to Reader financial statements. An unaudited financial statement prepared by an accountant, a Notice to Reader can be an excellent indication of a business’s current financial situation.
It’s not the be-all and end-all.
Did You Know?
There are three levels of financial statements:
- The Notice to Reader
- The Review Engagement
- The Audit
Notice to Reader
The Notice to Reader is a financial statement prepared by an accountant in accordance with Canadian standards but all of the numbers are based on information provided by management and are not independently verified.
The Review Engagement involves a significantly greater number of processes than the Notice to Reader, and yet it is much less extensive than an audit. While it is prepared using the balances provided by the company’s accounting system, Review Engagements verify accuracy by following a number of procedures.
The Audit is the most entailed of the three and the cost tends to be substantial. Very few for-profit companies without extensive public funding or interest actually ever require an audit. This explains why you likely haven’t seen many throughout your business purchasing endeavours. But, this is clearly the most reliable, detailed and verified financial information you can receive.
Do You Know Enough About the Business You’re About to Buy?
Simply reviewing the Notice to Reader financial statements (which are the financial statements you’re likely to be presented with during your due diligence) isn’t enough. It’s critical that you independently confirm what you see in the statement. For example, have you had a look at the company’s bank statements? Have you seen revenue deposits? Have you monitored purchases over the last year? All of the numbers you see should coincide and make perfect sense. Think of the presentation of the company as a puzzle and all the pieces need to fit together or else you may have a red flag situation on your hands.
Trust the People You’re Buying From
Yes, a big part of the business world is about the numbers, but we can’t dismiss the importance of integrity, trust and instinct. In a business acquisition, you need to trust the sellers. Once you’ve independently verified the numbers and researched the company inside out and backwards, ask yourself, do I trust these people? Does everything add up? Am I comfortable with this transaction? Do I believe everything to be true?
You’re Not Alone – Get Advice!
Why try to navigate blindly through the acquisition process without any assistance? Hire a legal advisor to stand in your corner. Mistakes are made when people don’t get the advice they need in the beginning. Don’t wait until papers are signed and deals are closed to get professional guidance.
Making sure you’re properly informed from the very start could mean the difference between a lucrative and detrimental business purchase.