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Evaluating Business Financial Health

By Terri Petrey

Here are few possible questions to ask when contemplating the purchase of a business, legal action against a business, or simply whether or not your own business is saleable.

1) What is the typical profit ratio in the industry? Is it 30%? Is it 10%? Is it 1%? Are there published financial models that could be applied to determine whether costs are in line with the overall industry?

2) If a business grosses 2 million dollars, and the gross profit is $600,000, and the board reasonably declares a 10% dividend, shareholders receive $200,000, how does that relate to actual profits earned? Similarly, if the business only has a 10 % profit in a given year and the board decides to give 10 % profits out in dividends to keep the shareholders happy, is that a good thing?

3) Has the business run through its lifecycle? Is the concept still current and exciting? Is the physical aesthetic clean and fresh or dated and stale? Is further investment needed just to maintain the status quo?

4) Are there substantial management problems? Has the business been stripped of all saleable assets? What is the debt level? Is the company pre-bankruptcy? Is there a decent set of books? Is the company current with IRS, Department of Labor and Industries, Department of Revenue and other tax and regulatory agencies?

Full post as published by The Law Blawg of Theresa Petrey, PLLC on April 01, 2007 (boomark / email).