Lost money on a sandwich franchise

[Steve]

Today I was talking with an entrepreneur who lost quite a bit of money on a sandwich franchise.

He had gotten some money from a death in the family and decided he would buy this already up and running franchise from another business owner.

There were two big problems. The new owner had a fulltime job elsewhere and second, the previous owner cooked the books and showed the business to be making money when it was in fact losing money.

The store is now closed.

We were having this discussion about how you can just never really verify such things. My view was I am sure there is a way to potentially put some money aside in a fund that would only be transfered to the original owner if certain financial conditions are met, however barring that, there is no way to certify a business made $x amount of dollars last year.

Hmmmm maybe you could get the businesses accountant to sigh off that the business did indeed make what ever they claim to have made in some kind of audit? And then the accountant would be held liable if this were false?

What's your thoughts on something like this?

Any thoughts on how to confirm such income before you buy a already running business or franchise?

[swstout]

Today I was talking with an entrepreneur who lost quite a bit of money on a sandwich franchise.

He had gotten some money from a death in the family and decided he would buy this already up and running franchise from another business owner.

There were two big problems. The new owner had a fulltime job elsewhere and second, the previous owner cooked the books and showed the business to be making money when it was in fact losing money.

The store is now closed.

We were having this discussion about how you can just never really verify such things. My view was I am sure there is a way to potentially put some money aside in a fund that would only be transfered to the original owner if certain financial conditions are met, however barring that, there is no way to certify a business made $x amount of dollars last year.

Hmmmm maybe you could get the businesses accountant to sigh off that the business did indeed make what ever they claim to have made in some kind of audit? And then the accountant would be held liable if this were false?

What's your thoughts on something like this?

Any thoughts on how to confirm such income before you buy a already running business or franchise?

The first thing I would do before investing is to check his rateing with his suppliers. How he paid his bills would indicate how well he was doing.

Steve

[turfmaster]

Some years ago we bought a retail business.
The previous owners told us the business averaged so much per year for the last 5 years.

Our agreement with them was to view their tax returns with our accountant to verify their numbers prior to purchasing the business. :)

[Steve]

Our agreement with them was to view their tax returns with our accountant to verify their numbers prior to purchasing the business.

How did that ultimately work out? Also was there anything in the contract to compensate you if they had lied about the previous income or no?

Do you have any further advice on what to look out for when purchasing a used business?

[AccountingSPOT]

If I were buying a business, I would require an audit (done by a CPA) of the financial statements...would you buy a house w/o doing an inspection? Hopefully not! An audit verifies (at least to a very high likelyhood) that the financial statements are accurate and the profits they show are for REAL.

An audit will confirm that there are no errors or fraud going on with the financials. I was trying to find a link to a source indicating just how much an auditor would be liable for, but have been unable to find anything solid. An auditor does hold some liability, I'm just not sure to what extent.

As far as setting funds aside until certain financial obligations are met...anything can be agreed upon in the sale agreement. However, as an honest SELLER, I would not agree to those terms. That would put my business sale profits in the hands of the new management.