Q&A: The Balance Sheet When Buying a Business

You have to separate your personal finances from your business’ finances. Mixing them causes all kinds of problems. The confusion is common when people are purchasing a business. Take this example, from an email sent to our Ask the Experts forum today:

Question: I am having some problem balancing the balance sheet in my business plan. Specifically, I need to know where to insert these amounts in the cash flow table:

1. Cash in savings
2. Sellers carry-back amount to be paid back in 12 months.
3. Long Term business loan amount. These are parts of cash received to start and sustain the business but should also be noted as a liability. The majority of the funds on item 3 will be used to purchasing an existing business. To show it as an injection of cash received may not be an accurate depiction of cash available at the start of the business. I tried to put this amount as part of the past performance liability but I was not able to balance the numbers in the balance sheet section.

The email mentions seller carry-back financing. Does the business owe that money, or do you, personally? That could go either way. If you owe that money it has no place in the business plan, and if the business owes it then it belongs in the last column of the appropriate row of the Past Performance table.

Don’t worry about where that money is going, just estimate the ending balance amounts: cash, other assets, liabilities, etc. Remember this is balance amounts for the business, not you personally.

Then there’s the projected cash flow for the rest of the business’ life, changes that you will enter as estimated guesses in the input rows of the Cash Flow table, which will then automatically adjust the balance sheet. The Help in Business Plan Pro is very good on this, use it. Look for examples of loan repayment because you’ll want to type that into the Cash Flow, using a function to help you calculate if you want. The loan you mention belongs at the end of Past Performance, and the principal repayment goes into the cash flow. Use the keyword search in Help. Check also the help on purchasing a business, you have some choices in setup on that.

Whatever you put in the ending balances of Past Performance is going to be the starting balance of the Balance sheet. From then on, you input amounts in the Cash Flow table for adjustments to the balance. This of course is because such things as loan repayments or purchase of assets cost you cash but don’t directly appear on the Profit and Loss, so you need to put them into the Cash Flow or else your cash flow isn’t accurate.

When in doubt, follow the money. Loan repayment costs cash. And remember the timing. The ending balance in Past Performance is beginning balance in Balance Sheet.

Finally, remember that this is necessarily a closed system. You have a very summarized Balance Sheet necessarily, because this is planning, not accounting. Your assets are long-term assets, less depreciation, plus short-term assets, period, nothing else. Short-term assets are cash, inventory, receivables, and all others. Liabilities are payables, current liabilities, and long-term liabilities. There are no extra categories. Start with the sums and work downwards.

And remember the Help. It’s keyword searchable and it’s full of examples.

– Tim