Buying a business in another country comes with an extra layer of uncertainty. You may understand the industry, recognize a good opportunity, and even have a clear idea of what you are willing to pay. But when the financial statements come from a seller you have never worked with, knowing which numbers to trust becomes a different challenge.
The seller’s accountant prepared those documents to serve the company’s reporting and tax needs, not necessarily to answer your questions as a potential buyer. Revenue might look impressive while cash flow tells a different story. Expenses may include personal costs, outstanding liabilities might be missing from the summary, and unfamiliar accounting rules can make comparisons difficult.
Start With the Documents Behind the Asking Price
The first step is to request enough documentation to build a reliable financial picture. A seller’s summary or spreadsheet is useful for an initial conversation, but it should never be the only source you use to evaluate an acquisition.
Ideally, request three to five years of historical financial information, along with current year-to-date figures. This gives you a chance to identify patterns rather than relying on one unusually profitable year.
Your initial document request should include:
- Annual income statements and balance sheets for the last three years.
- Cash flow statements covering the same periods.
- Business tax returns and supporting tax schedules.
- Monthly financial reports for the current year.
- Bank statements and business credit card statements.
- Accounts receivable and accounts payable aging reports.
- Payroll records and employee-related obligations.
- Outstanding loan agreements, leases, and other financial commitments.
Ask for the original documents, not just spreadsheets prepared specifically for the sale. If the business operates in a country where financial records are issued in another language, arrange a professional certified translation of financial documents before relying on them. Elmura Linguistics can help overseas buyers, investors, and their legal or accounting teams understand financial statements, tax records, contracts, and supporting documents across language barriers.
The goal is simple: every important number in the seller’s presentation should be traceable to an underlying record.
How to Read Financial Statements From Small Businesses
Three financial statements deserve most of your attention during the initial review. Each answers a different question, and none should be evaluated in isolation.
1. Income Statement: Is the Business Actually Profitable?
The income statement, also called the profit and loss statement (P&L), shows revenue, operating expenses, and profit over a specific period.
Start by comparing annual revenue across several years. Look for consistent growth, sudden drops, and unusual increases that need an explanation.
Then examine the cost structure. Are material costs rising faster than sales? Has payroll increased significantly? Are rent, insurance, or supplier expenses unusually low compared with similar businesses?
Pay particular attention to gross profit margin and operating profit margin. A company can increase sales while becoming less profitable if the cost of delivering its products or services rises too quickly.
You should also ask whether the reported profit includes unusual income, such as a one-time insurance payment, asset sale, or government grant. These amounts can make a particular year look stronger than normal operations would justify.
2. Balance Sheet: What Are You Actually Taking Over?
The balance sheet provides a snapshot of the company’s financial position on a particular date. It lists assets, liabilities, and owner’s equity.
For a buyer, the most important question is whether the assets shown on paper are genuinely available and worth their recorded amounts.
Consider the following:
- Accounts receivable: Are customers paying on time, or has the business accumulated overdue invoices?
- Inventory: Is the stock current, saleable, and correctly valued?
- Equipment: Does the company own the machinery listed, and is it in usable condition?
- Loans and liabilities: Are there outstanding debts, unpaid taxes, or obligations that could affect the acquisition?
- Owner’s equity: Does the company’s financial position support the valuation being presented?
An asset listed at $100,000 on the balance sheet does not automatically mean it could be sold for that amount. You need to verify ownership, condition, market value, and any restrictions attached to it.
3. Cash Flow Statement: Is Profit Turning Into Cash?
This is often where buyers discover problems that were not obvious in the income statement.
A company can report healthy profits while struggling to collect customer payments or meet monthly obligations. The cash flow statement helps explain why.
Look at cash generated from operating activities. Is the business consistently bringing in more cash than it spends on everyday operations?
Also examine investing and financing activities. Large equipment purchases, loan repayments, and new borrowing can significantly affect the company’s available cash.
If profits are increasing but operating cash flow is declining, investigate the reason before moving forward.
Compare the Three Statements, Not Just Their Headlines
The biggest mistakes often happen when buyers review financial statements separately. The documents should tell a consistent story.
| Financial document | What to examine | Potential warning sign |
| Income statement | Revenue, gross margin, operating profit | Rising sales but declining margins |
| Balance sheet | Assets, liabilities, receivables | Growing overdue invoices or unexplained debt |
| Cash flow statement | Operating cash flow and financing | Profits increasing while cash reserves fall |
However, the balance sheet shows that customer receivables have doubled, while the cash flow statement reveals that operating cash has declined significantly.
This changes the picture. The business may be recording sales faster than it collects payments. Unless you understand why this is happening, you cannot confidently estimate how much working capital you will need after the purchase.
Check the Numbers Against Independent Records
A seller’s financial statements are only as reliable as the records supporting them. This is why independent verification matters.
Start by reconciling reported revenue with bank deposits, invoices, payment processor statements, and tax returns. Differences are not automatically evidence of wrongdoing. Timing differences, cash transactions, accounting adjustments, and tax treatments can explain some discrepancies.
However, every material difference should have a documented explanation.
The IRS guidance on business recordkeeping provides a useful reference for understanding the supporting documents behind reported income, expenses, purchases, and assets.
If the business operates outside the United States, use the equivalent tax authority and accounting requirements in its home jurisdiction. Do not assume that American reporting conventions apply everywhere.
It is also worth comparing the seller’s financial reports with records from suppliers, customers, lenders, and payment providers where legally accessible.
Watch for Add-Backs That Inflate the Business Value
Sellers frequently adjust reported earnings to demonstrate how much money a new owner could potentially make.
These adjustments are commonly called add-backs. They may include the current owner’s salary, personal vehicle expenses, one-time legal fees, or other costs that supposedly would not continue after the acquisition.
Some adjustments are perfectly reasonable. Others deserve closer attention.
For every proposed add-back, ask three questions:
- Was the expense actually recorded in the company’s financial statements?
- Is there supporting documentation showing what it covered?
- Would the expense genuinely disappear after the ownership change?
For example, adding back an owner’s personal travel expenses may be reasonable if those trips were unrelated to business operations. Adding back recurring equipment maintenance is much harder to justify because the new owner will still need to maintain that equipment.
Do not automatically accept the seller’s adjusted earnings calculation. Rebuild it yourself, using only adjustments you can verify.
Overseas Acquisitions Require Additional Financial Checks
Buying across borders introduces risks that domestic buyers may not face. Even when the business looks financially healthy, differences in reporting standards, taxation, currency, and local regulations can affect its real value.
Here are several areas worth investigating before signing an agreement.
Currency and Exchange Rate Exposure
If the business earns revenue in one currency but pays suppliers or employees in another, exchange rate movements can affect its margins.
Calculate historical performance in both the local currency and your intended investment currency. This helps you distinguish genuine business growth from changes caused by currency fluctuations.
Local Tax and Accounting Rules
Accounting standards differ between countries. Some businesses use IFRS, while others follow national accounting frameworks or different tax reporting conventions.
Ask an accountant familiar with the target country’s regulations to review the records. Pay special attention to VAT or sales tax, corporate income tax, payroll obligations, and outstanding assessments.
Ownership Structure and Existing Obligations
Understand whether you are purchasing company shares or selected business assets. These structures can create very different financial and legal responsibilities.
In a share acquisition, existing obligations generally remain within the acquired company. An asset purchase may offer a different risk profile, but the treatment depends on local law and the terms of the transaction.
Have a local attorney review the proposed structure before committing.
FAQ
Conclusion
Buying a small business overseas can be a valuable opportunity, but the seller’s financial presentation should never be the deciding factor. You need to understand how revenue is generated, whether reported profits translate into cash, what liabilities remain, and which expenses will continue under new ownership.
Take the time to reconcile the statements, verify supporting documents, question unusual adjustments, and account for local tax and currency considerations.
Most importantly, bring in independent financial and legal professionals before committing your money. A careful review may take longer than expected, but discovering a problem before closing is far better than inheriting it afterward.
Viola Moorhouse is the coauthor and research lead at Sharkalytics.com, specializing in startup performance tracking and investor strategy.
With a background in market research and business journalism, Viola focuses on separating the hype from the reality in the world of televised entrepreneurship. She’s passionate about making complex startup stories accessible to a wide audience.
