Most buyers look at a business and see the product, the staff, the location, the brand. Those things matter. But the financial statements tell you whether the business actually works as an investment.

Reading financials before making an offer isn't about being an accountant. It's about knowing what questions to ask, which numbers to trust, and what patterns signal risk. Get this right and you make a better offer. Get it wrong and you overpay for something that looks healthy on the surface but is quietly bleeding cash.

This guide walks you through how to analyse business financials for acquisition in 2026 — the key documents, the numbers that matter most, and the warning signs that should change your position before you sign anything.

Start With Three Years of Financials, Not One

A single year of accounts tells you almost nothing useful. One strong year could reflect a one-off contract, a COVID recovery bounce, or a seller who has been managing expenses down ahead of a sale. Three years gives you a trend.

Ask for:

  • Profit and loss statements (P&L) for the last three financial years
  • Balance sheets for the same period
  • Business Activity Statements (BAS) to cross-check GST-reported revenue
  • Recent management accounts if the last full-year accounts are more than six months old

If a seller resists providing three years of documents, that resistance is itself worth noting.

Understand the P&L Before You Touch the Balance Sheet

The profit and loss statement is where most buyers spend their time, and rightly so. It shows revenue, cost of goods sold, gross profit, operating expenses, and net profit. But for an SME acquisition, net profit is rarely the most useful number.

Focus on EBITDA and SDE

EBITDA (earnings before interest, tax, depreciation, and amortisation) strips out financing decisions and non-cash charges, giving you a cleaner picture of operating performance.

SDE (seller's discretionary earnings) goes one step further. It adds back the owner's salary, personal expenses run through the business, and any one-off costs that wouldn't recur under new ownership. For owner-operated SMEs, SDE is typically the more relevant measure of true earning power.

When a seller quotes you a price as a multiple, ask what that multiple is applied to. A 3x multiple on EBITDA is a very different proposition from a 3x multiple on SDE. The base figure matters as much as the multiple itself.

Check Revenue Quality

Not all revenue is equal. Ask yourself:

  • Is revenue concentrated in one or two clients? If the top three clients represent more than 40 percent of total revenue, that's a concentration risk.
  • Are contracts in place, or is the revenue relationship-dependent and likely to walk out the door with the owner?
  • Is revenue growing, flat, or declining across the three-year period?
  • Are there seasonal patterns that could affect cash flow in the months after you take over?

Read the Balance Sheet for What the Business Actually Owns and Owes

The balance sheet shows assets, liabilities, and equity at a point in time. For an acquisition, you're primarily interested in what you're buying and what obligations come with it.

Assets to Scrutinise

Accounts receivable: A large receivables balance looks like an asset — but only if those invoices actually get paid. Ask for an aged receivables report. Anything outstanding beyond 90 days deserves a clear explanation.

Inventory: If the business carries stock, understand how it's valued. Outdated or slow-moving inventory may be worth considerably less than the balance sheet suggests.

Fixed assets: Equipment, vehicles, and fit-outs are listed at book value after depreciation. Book value rarely reflects replacement cost or current market value. If physical assets are a significant part of the deal, get an independent assessment.

Liabilities to Understand Fully

Accounts payable: How long is the business taking to pay its suppliers? Stretched payables can be a sign of underlying cash flow pressure.

Loans and finance leases: These may or may not transfer with the business depending on deal structure. Understand exactly what debt stays, what gets cleared at settlement, and who carries responsibility for it.

Deferred revenue: If customers have paid in advance for services not yet delivered, that liability transfers to you. You'll need to deliver that work without receiving the cash again.

Normalise the Financials Before You Model Anything

Raw financials from an owner-operated business almost always need adjustment before they reflect the true economics of the business under new ownership.

Common add-backs include:

  • Owner's salary (above or below market rate)
  • Personal vehicle expenses, travel, or phone costs run through the business
  • One-off legal fees, fit-out costs, or redundancy payments
  • Rent paid to a related party at above or below market rates

Common deductions include:

  • Costs the seller has been deferring, such as maintenance, equipment replacement, or staffing
  • Revenue from contracts that won't continue post-sale

This process — recasting or adjusting the financials — is standard practice, but it requires judgment. A seller's add-backs aren't always defensible, and a buyer's deductions aren't always fair. The negotiation often happens here.

This is where financial modelling becomes genuinely useful. Rather than accepting a single set of adjusted numbers, a properly built model lets you stress-test assumptions, run downside scenarios, and understand what the business needs to earn to service any acquisition debt and still deliver a return. At Everest Commercial Property & Business Brokers, financial modelling is part of the buying support process for exactly this reason.

Cross-Check the Numbers Against BAS and Tax Returns

Sellers sometimes present management accounts that look better than the numbers reported to the ATO. The cross-check is straightforward.

Compare the revenue on the P&L to the GST-reported turnover on the BAS statements. They should reconcile. If the P&L shows significantly higher revenue than the BAS, ask why. The explanation might be legitimate — some revenue may be GST-exempt — or it might not be.

Do the same with net profit on the P&L versus taxable income on the tax return. Persistent gaps between accounting profit and taxable income are worth understanding before you go any further.

Look at Cash Flow, Not Just Profit

A profitable business can still run out of cash. The cash flow statement shows how money actually moved through the business during the year, broken into operating, investing, and financing activities.

For an SME acquisition, operating cash flow is the critical figure. If it's consistently lower than reported net profit, the business may have a working capital problem. Growth businesses often show this pattern because they're funding receivables and inventory. But a mature, stable SME should generally convert profit to cash at a reasonable rate.

If the business doesn't produce formal cash flow statements, you can construct a rough version from the P&L and balance sheet movements. Your accountant or broker can help with this.

Know the Difference Between What You Are Buying and What You Are Not

Financial analysis doesn't happen in isolation from deal structure. In an asset sale, you typically buy the business's assets and goodwill but not its liabilities or legal history. In a share sale, you buy the entity itself — including all historical liabilities.

This distinction changes how you read the balance sheet. In an asset sale, many balance sheet items become largely irrelevant. In a share sale, everything on that balance sheet is your problem from day one.

Clarifying the proposed deal structure before you go deep into financial analysis saves time and prevents you from modelling the wrong scenario entirely.

What to Do When the Numbers Raise Questions

Not every discrepancy is a red flag. Some are explained by accounting choices, timing differences, or legitimate business decisions. The right response is to ask the question clearly and document the answer.

If the seller or their broker can't explain a material discrepancy, that inability to explain is more informative than the discrepancy itself. A well-prepared seller will have clean, reconciled accounts and clear explanations ready.

Due diligence is the formal stage where questions get answered with supporting documentation. But you should be asking them well before due diligence begins. The financial review at the offer stage is about deciding whether to proceed and at what price. Due diligence is about confirming what you already believe to be true.

FAQs

What financial documents should I request before making an offer on a business?
At minimum, ask for three years of profit and loss statements, three years of balance sheets, BAS statements for the same period, and recent management accounts if the last full-year accounts are more than six months old. Tax returns and an aged receivables report are also worth requesting early.

What is the difference between EBITDA and SDE when analysing a business for acquisition?
EBITDA removes interest, tax, depreciation, and amortisation from net profit to show operating performance. SDE goes further by also adding back the owner's salary and personal expenses run through the business. For owner-operated SMEs, SDE is usually the more relevant measure of true earning power.

How do I know if a seller's add-backs are legitimate?
Ask for documentation supporting each one. One-off costs should be backed by invoices. Owner salary adjustments should be benchmarked against market rates for the role. Related-party rent should be compared to market rents for the premises. If an add-back can't be documented, treat it with caution.

Why should I cross-check the P&L against BAS statements?
BAS statements report GST-collected revenue directly to the ATO and are harder to adjust retrospectively. Comparing BAS turnover to P&L revenue helps confirm that the figures you're being shown are consistent with what the business actually reported to the tax office.

What does it mean if operating cash flow is lower than net profit?
It typically means the business is building up receivables or inventory, or has slow-paying customers. In a mature SME, a persistent gap between profit and operating cash flow can indicate working capital pressure. Understand the cause before making an offer.

Should I hire an accountant to review the financials before making an offer?
Yes, particularly for any business above $500,000 in purchase price. An accountant familiar with SME acquisitions can identify normalisation adjustments, flag inconsistencies, and help you build a realistic view of post-acquisition cash flow. Your broker should be able to work alongside your accountant throughout this process.

How does deal structure affect how I read the balance sheet?
In an asset sale, you generally don't acquire the seller's liabilities, so many balance sheet items are less relevant to your analysis. In a share sale, you acquire the entire entity including all historical liabilities, so the balance sheet requires much closer scrutiny. Clarify the proposed deal structure early so you're analysing the right numbers.

Reading financials well is a skill that protects you from overpaying and puts you in a position to make a confident, defensible offer. The numbers rarely lie outright — but they do require context, comparison, and the right questions.

If you're actively looking at businesses to acquire in Victoria or New South Wales, we work with buyers through the full financial review and due diligence process, including financial modelling built around your specific acquisition. Browse current opportunities at Everest Commercial Property & Business Brokers.