Analyzing Balance Sheet

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June 04, 2024

by a professional from Indian Institute of Technology, Delhi in Atlanta, GA, USA

Hi All,
I was recently analyzing balance sheets of a business and saw some interesting numbers (rounded up):
1. Cash in bank account: $20k
2. Total A/R: $1M
3. Total assets: $800k
4. Total liabilities: $4M (50% is outstanding debt)
5. Total Equity: -$3.5M (significant draws from the owners)
6. Total liabilities and equity: $850k

The sellers want to pay out the debt using proceeds from the sale. Curious to hear what folks feel about the health of the business and how the owners have been running it.

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Reply by a searcher
from Concordia University in Toronto, ON, Canada
A few technical points: Why the balance sheet is not balanced! How the total assets are lower than A/R? Total Liabilities + Total Equity <> Total Liabilities & Equity.
Seems the business is unprofitable / burning cash, assuming the loans are from an institutional investor, they will not allow a large divided check. This situation happens in start-ups, however mostly are funded by equity, not debt.
As you share only the balance sheet, I understand it's an asset purchase, right? Unless you project a large growth, it doesn't make sense to pay >$2M for <$1M of unprofitable or underutilized assets. Suggest you check also the NOL tax credit balance and whether you can use them.
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Reply by a lender
from Montclair State University in Odenton, MD, USA
From a lending perspective, there are some concerns. It appears to be a profitably issue with the company and why there is so much debt on the balance sheet. If they are using debt to fund the operations and also draining the profits in the business, it’s a management issue but it may also be that the business model is not one that is set up where the assets of the business can generate enough cash flow. The unfortunate part is when you buy the business, you will have 80 to 90% leverage on the balance sheet on day one and you don’t have the luxury of using debt to fund the operations. I would proceed with caution.
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