When a prospective purchaser is trying to figure out whether they will buy a business operation they're researching, there are an array of points to review and take into consideration. When a prospect appears on the horizon, quite separate from the usual questions of location, suitability and longevity, the crucial issue of establishing a real-world business valuation is the primary interest.

The seller will display a variety of financial documents, and it most certainly is, of course, greatly in their interests to make their business for sale in Dubai seem like a bright shining light amidst any questions which may arise. At such time, the issue of "add backs" will in all likelihood represent one of the most difficult to tackle problems.

Set of Rigid Principles

In a majority of cases, add backs are included to try and present the operation from a real world perspective. As a set of rigid principles must be adhered to when compiling traditional accounting reports, there may well be additional footnotes to consider and these can be either negative or positive depending on your perspective. It is very important when you buy a business to scrutinize each add back as they can often make a considerable difference to your valuation.

Conducting a Process

When conducting a process of due diligence, it can be a fairly straightforward procedure to check recorded sales and purchases against ledgers and against reconciled bank accounts. Very often however the outgoing owner will be keen to draw your attention to items which may be "one-off" or to additional income which may not necessarily appear on the books at all. You should be open to all suggestions of course but maintain a degree of skepticism at all times until you are able to validate the claims, or otherwise.

Requirements

Remember that for an item to be claimed as "one time" it must not have appeared during preceding years. Seller could argue that a particular expense is much larger than it should be due to a particular incident or requirement, but if you see a pattern of any kind then the add back must be discounted.

Common Add Backs

One of the most common add backs, especially when the business can be owner operated, is to suggest the value of a manager's salary. You need to establish that the outgoing owner was not actively involved in the operation of the business in this case and this figure is only of interest to you if you intend to assume the role of the redundant manager.

Represent Intangibles

Add backs may not be asserted whenever they represent intangibles, such as the prospect of additional revenues due to a new marketing initiative that the outgoing owner has just put in place, for example. Nor should you believe an owner claim that you can reduce a certain category of expenses through renegotiation or other initiatives. After all, if the outgoing owner has not being able to do so to this point it seems reasonable to assume that an incoming "newbie" is likely to have even less ability to affect short-term change in this regard.

Lot of Cash Sales

Be particularly wary when you are told that a business retains a lot of cash sales. You must essentially discount this notion from a strict valuation perspective, even though such a claim made, after review, may be seen as reasonable. If the owner has not entered the cash sales on the books, he or she will not have accounted for taxes correctly and it's not fair for them to expect to receive a double benefit in this way, a net tax saving and enhanced business value.

Conclusion

When you have reviewed the complete list of business financials, treat each claim for add back on an individual case basis and never roll them into an inflated value. At this stage, you must be particularly diligent to enable you to arrive at a real-world price for this prospect.