How to Research a Business Opportunity

Analyzing the Financial Statements

Profit and loss statements are part of the financing process. In business offerings, these are usually statements audited by a CPA. When you look at a licensor, you'll want to see an audited statement of the company's earnings. You'll know you're getting a legitimate financial statement because CPAs will not stamp a statement that hasn't been properly audited and certified.

You should have an accountant look at the finacial statement and interpret exactly what the statement represents for you. You should compare statements from at least two years to see the direction in which the company is moving: Is it on an upswing or a downswing? Is it becoming more profitable and more efficient? The balance sheet, which shows the company's assets and liabilities, is another yardstick with which to determine the strength of a company. The profit-and-loss statement tells you how much money the company is making or losing. The balance sheet tells you what the company is worth in terms of assessing a company's strength.

Companies may give you pro forma projections to show what you can expect to earn in this particular business opportunity. A pro forma is a projected financial statement. It is developed by taking the typical costs for a unit doing $200,000, $300,000 or $400,000 a year and showing you approximately what you can expect to earn at each of those sales levels. Some states have outlawed the use of pro-forma statements except in the case of current operating units. In terms of their reliability, they do not always accurately reflect earning potential.

We recommend examining actual audited operating statements to get a good feel for what this company is doing. Larger companies will be able to provide you with these. Smaller companies usually can't, and that's where a gamble is involved. This is where you have to use your own personal accounting and legal assistance in order to thoroughly check out a company.

Source: The Small Business Encyclopedia

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