Before buying a business, read the accounts as evidence, not as a sales brochure. Check turnover, profit, margins, debtors, creditors, tax, cash, add-backs, owner pay, stock and whether recent trading matches the seller's claims.
Quick Answer: How do you read small business accounts before buying?
When reading small business accounts before buying, your goal is to determine whether the figures actually support the asking price — and whether the business can generate enough cash to sustain itself after you take over.
Start with the profit and loss account. Check revenue, gross profit, net profit, adjusted profit, owner salary and any add-backs the seller is claiming. Then move to the balance sheet and examine stock, debtors, creditors, loans, director loan accounts, VAT liability and cash. Finally, compare the filed accounts with bank statements, VAT returns, EPOS reports, booking data or any other independent source available during due diligence.
Do not rely only on filed accounts at Companies House. Small company accounts are often abbreviated and give you limited detail. Ask for full management accounts, the profit and loss breakdown, and supporting schedules. If the seller cannot or will not provide these, treat that as a warning sign in itself.
Always use a qualified accountant to review the numbers before you commit. Accounts are not just paperwork — they tell you whether you are buying a real business or an expensive liability.
Contents
Start with the question: what am I really buying?
Accounts are not just a legal formality. They are the closest thing you have to objective evidence about how a business has actually performed — rather than how the seller would like it to appear.
Before you look at any numbers, frame everything around a single question: does this business generate enough reliable cash, after all real costs, to justify the asking price and sustain me as the new owner?
The accounts help you answer a long list of sub-questions:
Is the business profitable on a sustained basis, or just in one good year?
Is profit growing, flat or falling?
Is revenue stable or dependent on one or two customers?
Are margins healthy relative to the industry?
Is the owner significantly underpaying themselves, making the profit look better than it really is?
Are costs missing or understated?
Is stock overvalued on the balance sheet?
Are customers paying on time?
Are suppliers being paid, or are there arrears building up?
Is the business carrying debt that will transfer to you?
Does the asking price reflect realistic maintainable profit?
Will the business generate enough cash after completion to service any debt you take on to fund the purchase?
Every claim in the listing — "highly profitable," "established customer base," "strong recurring revenue" — should be tested against the accounts. If the listing says one thing and the accounts say another, you need to find out why before you make an offer, not after.
Turnover: is revenue stable and believable?
Turnover is the total value of sales the business has made before any costs are deducted. It is the top line of the profit and loss account, and it sets the scale of everything else.
High turnover is not the same as a good business. A business can have impressive sales figures and still be loss-making, cash-poor or dependent on a single contract that could disappear. Turnover matters, but only in context.
When reviewing turnover, look at:
Three-year trend.Is revenue growing, flat or declining? A business that has grown from £400,000 to £600,000 over three years tells a very different story to one that has fallen from £700,000 to £500,000 — even if the current figure is the same.
Monthly breakdown.Ask for monthly revenue data, not just annual totals. Seasonality, lumpy sales and one-off peaks all become visible at the monthly level.
Revenue by product or service.If the business sells multiple things, which lines are growing and which are declining?
Revenue by customer.Heavy dependence on one or two customers is a significant risk. If the top customer represents 40% of sales and decides to leave or renegotiate, you have a serious problem.
Revenue by channel.Does income come from walk-in trade, online, repeat contracts, referrals or one-off projects? The mix tells you a great deal about predictability.
Cash vs card vs bank transfer.For retail or hospitality businesses, understanding how money comes in matters. Cash-heavy businesses require careful corroboration.
Recent trading.What has happened in the last three to six months? Old filed accounts can be misleading if recent trading has changed significantly. Always ask for the most recent management accounts or bank statements.
Questions to ask about turnover
Has turnover increased or decreased, and what drove the change?
Is revenue recurring or does it require constant new customer acquisition?
What percentage of revenue comes from the top three customers?
Are there contracts in place, and if so when do they expire?
Has any major customer given notice or reduced their spend?
Does recent trading match the figures in the last filed accounts?
Are there any one-off sales inflating the headline number?
A detailed turnover review often reveals things the seller has not volunteered. That is why you ask.
Gross profit: does the margin make sense?
Gross profit is what the business earns after deducting the direct costs of producing or delivering what it sells — typically the cost of goods, raw materials and direct labour. Gross margin is gross profit expressed as a percentage of sales.
A simple example:
Sales - £300,000
Cost of sales - £180,000
Gross profit - £120,000
Gross margin - 40%
Gross margin is one of the most informative single numbers in the accounts. It tells you how efficiently the business converts sales into income before fixed overheads. A margin that looks out of line with industry norms — either much higher or much lower — needs explanation.
When reviewing gross margin, check:
Year-on-year trend.Is margin improving or eroding? A falling margin on steady sales can mean rising costs, pricing pressure or worsening stock control — all of which become your problem post-completion.
Margin by product or service.Some lines may be high-margin and others low or negative. Understanding the mix matters if you plan to grow certain areas.
Stock wastage and shrinkage.Particularly important in food, retail and manufacturing. High wastage reduces effective margin and may signal operational problems.
Supplier cost inflation.Have input costs risen recently? Has the business passed these on to customers through pricing, or are margins being squeezed?
Direct labour.In service businesses, people are often the main cost of sale. Is the staffing model sustainable and correctly reflected?
Underpriced work.Some owners price too low to win business or retain customers. That may boost turnover but compress margin permanently.
A business with a falling gross margin is often more fragile than its headline profit suggests. Always understand why.
Net profit: what does the owner actually keep?
Net profit is what remains after all operating costs have been deducted from gross profit. It is the figure most buyers focus on — but it needs careful interpretation before you can trust it.
Common operating costs to check include:
Director salary and any bonus payments
Drawings taken by the owner outside of salary
Wages and salaries for all other staff
Rent and property costs
Utilities
Insurance
Marketing and advertising
Professional fees (accountancy, legal)
Repairs and maintenance
Finance costs (loan interest, lease payments)
Depreciation
IT and software costs
Vehicle costs
Any other overhead
The key issue is that many small businesses have significant owner-specific costs running through the business. The director may take a low salary and extract profit through dividends. Family members may be employed — sometimes at market rate, sometimes at above or below market rate. Personal expenses may be processed as business costs. These all affect what the net profit figure actually represents.
Your real question is:what is the true maintainable profit for a new owner?That means:
Replacing the current owner's input at a realistic market salary (if they work in the business)
Removing genuine one-off costs
Adding back genuine personal expenses that the current owner has run through the accounts
Removing any above-market costs that a new owner would not incur
This is not the same as blindly accepting the seller's adjusted profit figure. It requires you to understand every line of the profit and loss account.
Add-backs and adjusted profit
Most sellers of small businesses will present you with an adjusted profit figure — also called adjusted EBITDA, normalised profit or SDE (Seller's Discretionary Earnings). The idea is to show what the business would have earned without personal, one-off or non-recurring costs.
Add-backs are the specific costs that have been removed from reported profit to reach this adjusted figure.
Potentially valid add-backs include:
Genuine personal expenses run through the business (personal mobile phone, personal travel, personal subscriptions)
One-off professional costs such as a one-time legal dispute
One-off repairs or capital spending that would not recur
Non-recurring consultancy
Above-market wages paid to family members beyond their role's fair value
One-off bad debts
Weak or questionable add-backs include:
Normal marketing spend, claimed as "one-off" because the owner tried something new that year
Routine repairs and maintenance, even if they vary year to year
The entire owner salary removed, when in reality you will either need to replace the owner's work or work in the business yourself
Costs that recur every year under a different description
Software or tools genuinely needed to run the business
Rents below market rate (a related-party arrangement that a new owner may not benefit from)
Why this matters:If a business reports £40,000 net profit but the seller presents £90,000 adjusted profit based on £50,000 of add-backs, you need to be very confident those add-backs are real. A valuation based on £90,000 adjusted profit could be 30 to 50% higher than one based on the true maintainable figure.
Ask for an itemised schedule of every add-back, with supporting evidence for each one. Your accountant should review these before you place reliance on the adjusted profit in your valuation.
Balance sheet checks
The profit and loss account shows trading performance over a period. The balance sheet shows the financial position of the business at a single point in time — typically the year end.
Key balance sheet items to review:
Assets:
Cash and bank balances (and whether they will be included in or excluded from the sale)
Stock (what it is, how it is valued, and whether the valuation is realistic)
Debtors — money owed by customers (see next section)
Fixed assets — equipment, vehicles, fixtures and fittings (and their condition versus their book value)
Intangible assets — goodwill, trademarks, website value (how were these valued?)
Liabilities:
Creditors — money owed to suppliers (see next section)
Bank loans and overdrafts
Finance agreements (hire purchase, leasing)
Director loan accounts — particularly if the director has drawn more than they have put in
Tax liabilities — corporation tax, VAT, PAYE
Any deferred income (money received from customers but not yet earned)
Warning signs on the balance sheet:
Negative reserves (accumulated losses) — the business has lost more than it has ever earned
Large director loan balances — the owner may have been taking money the business cannot support
Old stock that has been on the balance sheet for years — probably not worth its stated value
Loans or charge registrations you were not told about — always check Companies House for mortgage charge data
Companies House is a useful starting point for checking company filings, officer history, charge data and previous names. But it is a starting point, not a substitute for proper due diligence.
Cash, debtors and creditors
Profit is not the same as cash. A business can be technically profitable while simultaneously running out of money — if customers pay slowly, suppliers demand fast payment, or stock is building up.
Debtors
Debtors are customers who owe money to the business for goods or services already delivered.
Key questions:
What is the total debtor balance and how old are the debts? (Ask for an aged debtor report)
Are any debts more than 60 or 90 days old? Older debts are increasingly unlikely to be collected.
Are any debts disputed?
Are any debts owed by connected parties (related companies or people)?
Will the seller retain the old debtors, or will they transfer to you?
If debtors transfer to you, are they genuinely collectible?
In a share purchase (where you buy the company itself rather than just the assets), debtors typically transfer automatically. In an asset purchase, this is usually negotiated. Either way, understand what you are inheriting.
Creditors
Creditors are suppliers, HMRC, landlords or others the business owes money to.
Key questions:
Are suppliers being paid on time, or are there arrears?
Is there an aged creditor report and does it show any overdue balances?
Are there any HMRC payment plans in place for overdue VAT or PAYE?
Are there any disputed invoices or legal claims from suppliers?
Which creditors will transfer with the business and which will remain with the seller?
A business that is falling behind on its creditors is often in more difficulty than the profit and loss account suggests. Creditors can call in debt, withdraw credit terms or damage supplier relationships — all of which create problems for you as a new owner.
Cash
Cash seems simple, but there are important nuances:
Cash-free/debt-free deals.Most small business sales are structured on a cash-free/debt-free basis, meaning the seller takes out the cash and pays off the debts before completion. Confirm how the deal is structured.
Working capital.Once you complete, you will need enough cash to pay staff, suppliers and overheads before customer payments come in. Understand how much working capital the business typically needs and whether the deal provides for it.
Cash burn.If the business runs at a loss in certain months, how much cash does it consume? Do you have the reserves to cover it?
A profitable business with poor cash management can still fail within months of a sale. Make sure you understand the cash cycle before you complete.
Tax, VAT and payroll checks
Tax issues in a business can become buyer issues depending on how the deal is structured. In a share purchase, you inherit the entire company — including its historical tax position. In an asset purchase, you generally start fresh, though warranties and indemnities in the sale agreement should protect you.
Always ask for:
VAT returnsfor the last two to three years (if the business is VAT registered)
PAYE recordsand employer payroll summaries
Auto-enrolment pensioncompliance records
Corporation Taxcomputations and payment records
Self-assessmentrecords (for sole trader or partnership purchases)
HMRC correspondence— particularly any enquiry letters, compliance checks or penalty notices
Tax arrears— any outstanding amounts owed to HMRC
Payment plans— if the business is on a Time to Pay arrangement with HMRC, you need to know
It is worth noting that the VAT registration threshold increased to £90,000 from 1 April 2024. For businesses trading near this level, VAT status, pricing and invoicing practices all need careful review.
Payroll irregularities — unpaid employer NI, incorrect PAYE deductions, undeclared cash wages — can create significant liability. Your solicitor and accountant should review the payroll and tax position carefully as part of due diligence.
Questions to ask the seller
Before and during due diligence, you should be asking direct questions about the accounts. Do not assume — ask. A seller who is uncomfortable answering basic financial questions is telling you something important.
Good questions to ask:
What accounts are available, and for how many years?
Are management accounts available for the current period?
Were the figures prepared by an accountant?
How does the profit figure in the listing reconcile to the filed accounts?
What add-backs are included in the adjusted profit, and what is the evidence for each?
What salary does the owner take, and is it included or excluded from the reported profit?
Are any family members employed, and at what salary?
Are there any members of staff working informally or paid in cash?
Are there any tax arrears or HMRC payment plans?
Are there any outstanding loans, finance agreements or personal guarantees?
Are the debtors current and collectible?
Are all suppliers being paid on time?
Is stock included in the asking price, and at what value?
Is the business seasonal, and if so how does this affect cash requirements?
Has recent trading changed significantly from the last set of accounts, and why?
Write the answers down. If the answers change between conversations, that is a warning sign.
Accounts red flags
Not every discrepancy means fraud. Sometimes accounts are simply prepared conservatively, or the owner lacks financial sophistication. But patterns of evasion, inconsistency or implausibility are always worth taking seriously.
Pause and investigate further if:
The seller is reluctant to provide accounts at all, or delays repeatedly
The profit figure in the listing is significantly higher than anything in the filed accounts
Figures change between conversations or versions of the information memorandum
Add-backs are vague, undocumented or change when you ask questions
Cash sales are claimed but cannot be independently evidenced
VAT returns are missing or unavailable
Staff costs appear too low for the number of employees
The owner salary is ignored in the profit calculation without explanation
Gross margins are falling without a clear reason
Debtors are old and uncollected
Creditors are high and ageing
There are HMRC debts or payment plans in place
Stock appears to be valued above realistic market or resale value
Management accounts for the current year are unavailable
The seller is pushing you to make an offer before you have finished your financial review
Any one of these might have an innocent explanation. Several together are a reason to slow down significantly.
Buyer checklist
Use this checklist during your financial review:
Last three years of accounts requested and received
Latest management accounts requested (ideally for the last six months)
Revenue trend reviewed across all three years
Monthly revenue breakdown reviewed where available
Gross margin checked and explained
Net profit reviewed line by line
Owner salary and drawings understood and adjusted for
All add-backs reviewed, evidenced and stress-tested
VAT returns reviewed (if applicable)
PAYE and payroll records reviewed
Pension auto-enrolment compliance checked
Debtors reviewed — aged debtor report obtained
Creditors reviewed — aged creditor report obtained
Loans, finance agreements and charges checked on Companies House
HMRC correspondence reviewed
Stock valued and condition checked
Recent trading confirmed against management accounts or bank statements
Working capital requirement estimated
Accountant engaged and briefed to review the accounts independently
FAQs
Are Companies House accounts enough?
No. For small companies, Companies House filings are often abbreviated accounts — they show the balance sheet but not the full profit and loss breakdown. They are a useful starting point for checking officer history, charges and basic filing compliance, but they are not a substitute for full management accounts and due diligence.
What if the seller only has basic accounts?
Some small businesses, particularly sole traders or very small limited companies, have limited formal accounting. This is not automatically disqualifying, but it does increase risk. In this case, ask for alternative evidence: bank statements covering 12 to 24 months, VAT returns, EPOS or booking system reports, card payment summaries. The more you can cross-reference, the better.
Should I trust adjusted profit?
Only if the add-backs are specific, documented and genuinely non-recurring. Ask for a written schedule of every add-back with evidence. Have your accountant review it. Be particularly sceptical if the adjusted profit is more than 20 to 30% higher than the reported profit — this level of adjustment requires very strong justification.
What if the business is mostly cash?
Cash-heavy businesses — market stalls, small cafes, certain tradespeople — are harder to verify. They are not inherently dishonest, but the absence of a card trail means you are relying more heavily on the seller's word. Bank deposits, VAT returns and purchase invoices can help corroborate claims. Be cautious if the claimed turnover significantly exceeds what the bank statements can evidence.
Do I need an accountant?
Yes. A qualified accountant who has experience of small business acquisitions can identify problems that are not obvious to a non-specialist. The cost of an accountant's due diligence review is a small fraction of the cost of buying a business on the basis of misleading numbers.
What is the difference between an asset purchase and a share purchase when reviewing accounts?
In an asset purchase, you buy specific assets and liabilities rather than the company itself. Historical tax liabilities and most debts remain with the seller's company. In a share purchase, you buy the company and inherit everything, including historical issues. Share purchases require more thorough financial and legal due diligence as a result. Always discuss deal structure with your solicitor before making an offer.
Key takeaways
Accounts are evidence, not proof.They tell a story, but that story needs to be tested against other sources.
Turnover is vanity; profit is sanity; cash is reality.Focus on what the business actually puts in the bank, not just what it reports as profit.
Add-backs must be challenged.Every adjustment the seller makes to reported profit needs to be specific, evidenced and genuinely non-recurring.
The balance sheet reveals risk.Debtors, creditors, loans, director loan accounts and HMRC liabilities can all create problems after completion.
VAT, payroll and tax are not optional checks.Particularly in share purchases, historical tax issues become your problem.
Recent trading may matter more than old accounts.A business that was profitable two years ago but has declined since is worth significantly less — and carries more risk.
Use a qualified accountant.The cost is trivial compared to the cost of getting it wrong.
Related resources
Important disclaimer
Buy a Business Ltd is a marketplace, not a broker, corporate finance adviser, M&A adviser, law firm, accountant, tax adviser, lender, valuation firm, surveyor, insolvency practitioner or investment adviser. Information, guides, checklists and examples on this site are for general guidance only and do not constitute legal, tax, financial, investment, lending, valuation, property, employment, data protection, brokerage, corporate finance, M&A or regulated advice.
Buying a business involves risk. You should seek independent professional advice before making an offer, paying money, signing documents, taking over a lease, employing staff, relying on accounts or completing a business purchase.
Sources and useful references
Companies House / GOV.UK: Get information about a company
GOV.UK: VAT registration and deregistration threshold changes (April 2024)
GOV.UK: Business transfers, takeovers and TUPE
HMRC / GOV.UK: Transfer a business as a going concern and VAT Notice 700/9
ICAEW: Small company accounts filing requirements