7 Red Flags to Avoid When Buying an SMB
Jon and Holli discuss the critical topic of spotting fraud in small to medium-sized businesses (SMBs) during mergers and acquisitions (M&A). They outline seven red flags that potential buyers should be aware of, including inconsistent financial statements, unusual revenue trends, unreported liabilities, and more. The discussion emphasizes the importance of due diligence and thorough examination of financial records to identify potential fraud and protect investments.
Takeaways
Fraud is prevalent in 10-30% of transactions.
Inconsistent financial statements can indicate manipulation.
Due diligence is crucial when evaluating financial data.
Unusual revenue trends may suggest inflated numbers.
Unreported liabilities can hide significant debts.
Aging receivables may indicate uncollectible accounts.
Changes in accounting methods can be a red flag.
Excessive adjustments to earnings can inflate profits.
Tax returns should align with financial statements.
High customer concentration poses risks for businesses.
Keywords
fraud, SMB, M&A, financial statements, due diligence, red flags, accounting, equity adjustments, revenue trends, liabilities
Chapters
00:00 Introduction to Fraud in SMBs
02:46 Identifying Inconsistent Financial Statements
06:08 Recognizing Unusual Revenue Trends
08:59 Uncovering Unreported Liabilities
11:50 Assessing Inventory and Receivables
15:00 Understanding Equity Adjustments
17:16 Evaluating Adjusted Earnings and Tax Returns
