How to Verify a Business's Financials Before You Buy

A profit and loss statement tells a story. Financial due diligence asks whether the supporting evidence tells the same story—and whether that story will remain true after settlement.

For Australian buyers, verification normally involves more than checking arithmetic. Revenue must be traced to reliable source records, costs must reflect commercial reality, and accounting profit must be converted into the cash and return a buyer may actually receive.

1. Build a financial evidence pack

Australian Government guidance recommends independently checking three to five years of financial information when buying an existing business. Request records in their original or exportable form where possible—not screenshots selected for a sales presentation.

2. Verify revenue from the bottom up

The strongest approach uses several independent records. No single source is perfect, but the records should form a coherent trail.

Use both full-period and sample testing

• Compare monthly sales across at least three years to identify seasonality and unexplained spikes.
• Select high-value, unusual and random transactions and trace them to invoices, payment and delivery evidence.
• Reconcile merchant settlements after fees, refunds and timing delays.
• Compare cash takings to deposits, POS close reports and documented cash expenses.
• Review credit notes, refunds, voids and post-period reversals that may reduce reported sales.
• Analyse revenue by customer, location, product, service and channel to find concentration or declining segments.

Claims about “cash not put through the books” should not be accepted as additional maintainable revenue. Unsupported sales cannot be reliably valued and may indicate tax, compliance or control risk.

3. Should BAS sales match the profit and loss statement?

They may be close, but they do not always match automatically. A difference is a question to reconcile—not proof of misconduct and not something to ignore.

Common reasons can include:

• BAS reports GST-inclusive amounts while the profit and loss statement commonly presents income net of GST.
• The BAS and accounts use different timing or cash-versus-accrual recognition.
• Some income is GST-free, input-taxed, outside the GST system or recorded in a different BAS label.
• Adjustments, credit notes, asset sales, reimbursements or prior-period corrections are treated differently.
• Data was posted to the wrong account, omitted, duplicated or manually changed.

4. Convert reported profit into maintainable earnings

Small-business accounts are often prepared for tax or compliance purposes, not to show the return a buyer will receive. Build a transparent bridge from reported profit to normalised earnings.

Test every proposed add-back

• Confirm the expense appears in the accounts and obtain invoice or ledger evidence.
• Decide whether it is genuinely personal, discretionary or non-recurring.
• Check whether the cost will be replaced by a different expense after settlement.
• Do not add back recurring repairs, necessary software, normal marketing or essential travel simply because the seller calls them unusual.
• Adjust related-party rent, wages, purchases and management fees to commercial terms.

Price the owner's work

If the owner works 50 hours per week managing operations, purchasing, sales and administration, the business may need a replacement salary. A buyer who plans to work in the business should still distinguish the return on labour from the return on invested capital.

5. Profit is not cash flow

A business can report profit while consuming cash. Model the funds required to operate after settlement.

• Measure debtor days, creditor days and stock days by month.
• Identify customers who may not pay and stock that may not sell.
• Separate loan principal, tax payments and owner drawings from operating expenses.
• Estimate maintenance and replacement capital expenditure.
• Calculate the working capital to be delivered at settlement and the buffer needed for seasonality.
• Stress-test slower collections, lower margins, higher wages, rent increases and a sales decline.

6. Check payroll, tax and other liabilities

Wages in the profit and loss statement may differ from W1 on BAS because W1 is a BAS reporting label and accounting expense categories can include items treated differently. However, significant differences should be reconciled employee by employee and period by period.

• Reconcile payroll reports to bank payments, the general ledger, PAYG withholding and Single Touch Payroll information available from the seller.
• Separate gross wages, superannuation, payroll tax, workers compensation and leave expense.
• Check unpaid superannuation, leave balances, bonuses, commissions, overtime and contractor payments.
• Review current ATO integrated client account balances, payment plans and correspondence with an authorised professional.
• Understand employee entitlements and continuity-of-service issues in a transfer of business.

7. Financial red flags that need explanation

• Management accounts do not reconcile to tax returns, BAS or bank activity.
• Sales rise sharply just before marketing the business, without customer or transaction evidence.
• Gross margin changes materially while the product mix is said to be unchanged.
• Large, vague or unsupported owner add-backs drive most of the claimed profit.
• Accounts receivable is growing faster than sales or contains old balances.
• Suppliers are overdue, on stop-supply, paid through personal accounts or frequently changed.
• Stock increases while sales decline, or no reliable stock count exists.
• Employee numbers and payroll reports do not match the work being performed.
• Repeated ATO payment plans, late lodgments or unpaid superannuation are not clearly disclosed.
• The seller restricts direct access to source reports or only provides editable spreadsheets.

8. Ten financial questions to ask the seller

1. Which accounting basis is used, and has it changed?
2. What explains each material BAS-to-ledger difference?
3. Which customers and products generated the recent growth?
4. Which expenses will change when ownership changes?
5. What work does the owner perform, and what would replacement cost?
6. Which assets need replacement in the next three years?
7. How much working capital is required in the weakest month?
8. Are any suppliers, tax accounts, superannuation or employees overdue?
9. Which related-party transactions will end or change?
10. What event would cause the forecast to fail?

Authoritative Australian resources

• business.gov.au — Buy an existing business
• ATO — Overview of record-keeping rules for business
• ABN Lookup — Check entity and GST registration details
• Fair Work Ombudsman — Employee entitlements on a transfer