Annual accounts are a starting point when buying a business. They do not, by themselves, explain current trading, the customers behind revenue, the cash needed after completion or how the business will perform without its owner. A strong profit figure deserves investigation, not automatic acceptance or suspicion.
Start by identifying which accounts you have
Distinguish the public Companies House filing, full statutory accounts, management accounts and a seller’s adjusted earnings presentation. They serve different purposes and may contain different detail. Government guidance on small and micro-company accounts explains that eligible companies can provide reduced information publicly. A sparse public filing is not automatically evidence of misconduct, but it is not a complete acquisition review.
Check the reporting date, period length, accounting policies, notes, audit status and the date of any management update. A clean audit opinion, where present, does not answer every acquisition question or establish what price you should pay.
Six questions to ask behind the reported numbers
| Accounts headline | Question still to answer | Evidence to request |
|---|---|---|
| Revenue increased | Which customers, products and contracts produced the growth, and has it continued? | Monthly sales, customer concentration, contracts, credits and recent trading. |
| Profit looks strong | Which costs recur, and what must the buyer replace after completion? | Ledger detail, adjustment schedule, payroll and related-party arrangements. |
| Debtors increased | Will those invoices be collected, and on what dates? | Ageing, subsequent receipts, disputes and credit notes. |
| Inventory has value | Is stock usable, saleable and appropriately provided for? | Ageing, stock counts, costing, returns and slow-moving lines. |
| Year-end cash is healthy | Was that representative of the cash needed through the year? | Monthly balances, working capital trends and large payment dates. |
| Liabilities look manageable | What obligations and commitments affect the buyer’s funding plan? | Borrowing, leases, taxes, director balances and commitments for adviser review. |
Worked example: headline earnings and the owner’s role
This fictional example is not a client outcome or a valuation recommendation. A seller presents adjusted EBITDA of £300,000. The figure adds back £80,000 of owner remuneration on the basis that the owner will leave. The buyer expects the commercial and operational duties to continue and estimates a £60,000 annual replacement cost.
£300,000 proposed adjusted EBITDA − £60,000 omitted replacement cost = £240,000.
This only illustrates the stated replacement-cost adjustment. Other items, transaction assumptions and the quality of the evidence still need review.
The right question is not whether all owner pay is personal or all of it must recur unchanged. Establish what work the owner does, who will do it next and the supported cost. Discuss salary, employer costs, recruitment and handover where relevant. An adjustment supported by a label alone is not enough.
Do not multiply the £60,000 by an assumed market multiple and present that as an automatic price cut. Valuation, financing and negotiated deal terms need their own analysis. Our guide to using financial due diligence findings explains the next decision stage.
Profit and cash need separate investigation
A target may report profitable sales while customers pay slowly or stock builds up. Debt service, capital expenditure and tax payments can create funding needs not visible from an EBITDA headline. Ask how much cash is needed to run the business through a normal cycle and how that changes after completion.
Year-end balances can conceal seasonality. A retailer’s cash position after peak trading may look different from the position before inventory purchases. A consultancy’s debtor balance may depend on a few projects reaching customer approval. Review a series of periods rather than choosing one convenient date.
Ask questions that fit the target’s business model
Professional services
Who owns the client relationships? Are projects priced profitably? How much work is unbilled, disputed or dependent on the departing owner?
Retail and distribution
Which stock lines turn into cash? How do returns, discounts, purchasing commitments and supplier terms affect cash requirements?
Manufacturing and field services
What maintenance, equipment replacement, work in progress and delivery obligations are needed to sustain the earnings?
What to request before the next commitment
Agree a proportionate request list with your advisers. Useful starting records can include full annual accounts, monthly management reporting, ledger extracts, bank and debt schedules, sales by customer, aged debtors and creditors, stock or project schedules, payroll, forecasts and supporting contracts. Explain gaps and identify who is responsible for answering questions.
Use our buyer document request guide for the evidence discussion. Do not send confidential target records through a public enquiry form; agree access and confidentiality arrangements first.
What financial due diligence adds
ICAEW describes financial due diligence as supporting transaction decisions by investigating financial performance and risks. A defined review can connect headline figures to evidence and highlight matters needing further work. Financial findings do not replace legal, tax, commercial, operational or technical reviews.
Choose the scope around the proposed acquisition, information and decision. A targeted red-flag review and a broader financial review offer different coverage. Be clear about unresolved questions, excluded areas, intended users and any reliance terms before treating an output as sufficient for your buyer or lender requirements.
Frequently asked questions
Are Companies House accounts enough when buying a business?
No. Public filings can contain reduced detail and concern a historical period. A buyer needs information suited to the transaction, including recent trading and evidence behind material balances and adjustments.
Does an audit remove the need for financial due diligence?
No. An audit and acquisition due diligence have different purposes and scopes. An audit opinion does not answer every buyer question about sustainable earnings, future cash needs or transaction terms.
Can I add back all of the owner’s salary?
Not automatically. Establish which duties continue after completion and the supported cost of replacing them. The adjustment depends on the facts and the earnings basis being assessed.
Should I stop if the seller cannot provide a schedule?
Missing information needs investigation and a clear statement of what cannot be tested. Its significance depends on the decision, risk and alternative evidence. It is not automatically a clean result or proof of wrongdoing.
Does a financial review cover legal and tax risks?
Only the agreed financial scope is covered. Legal, tax and other specialist workstreams should be allocated separately unless expressly included, with clear handovers between advisers.
Alongside due diligence, our acquisition financial modelling and finance integration support connects purchase funding, operating cash, debt service and the post-completion plan. A balanced completion funding schedule does not by itself establish that the acquired business has enough ongoing cash.
Not sure where your business stands right now?
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Over 12 years across Big Four audit, Investment Banking, and corporate advisory. Kish works with SaaS founders, tech companies, and ambitious UK SMEs from £1M to £50M in revenue on fundraising, valuations, exit planning, and financial strategy. ICAEW regulated. Big Four trained. Based in London.