Good rule of thumb there Attila!

Also, where they say sale due to ill health that normally means that they're sick of the business!

And for prospective buyers, don't let your heart rule your head (and wallet).

As for more detailed checks to perform...

Is it a limited company? If so things get an awful lot easier as you can just get copies of their accounts for a nominal fee from companies house.

Have you got a copy of the accounts James? If so, questions to ask...

Were they prepared by an accountant?

Is there a huge directors loan account sitting in the accounts!

Are comparable figures available from the previous years accounts (this is a legal requirement per FRS3 Reporting Financial Performance and FRS28 Comparable amounts adherence to which is embedded in the companies act so don't be fobbed off by accounts that show no comparatives).

When you've got a couple of years figures go through them all on a straight comparison basis :

Current Year figure - Prior Year Figure * 100
Prior Year Figure

Have a look at the Acid test ratio

Current Assets - Stock
Current Liabilities

0.9:1 is about average. Let us know what this one is.

How long is it taking the company to turn stock into cash this year as opposed to last year? To calculate this do the calculation for both years :

Cost of Sales = X
Stock

365/X = Y (number of days to turn over stock)

Total Debts * 365 = A (number of days it takes credit customers to pay)
Sales

A + Y = number of days it takes to turn stock into cash.

Is this figure increasing year on year? is the timescale acceptable to you?

Also look at the creditors ratio :

Creditors * 365
Cost of Sales

Is it taking longer to pay creditors? That may be a sign of cashflow problems.

In addition to the above probably best that yoiu go through the entire ratio hierarchy for both years to check how the ratio's compare.

Once you've applied your analytical procedures make enquiries of all discrepancies to ensure that you understand why there have been changes.

The accounts will have told you if the business has loans or overdrafts. It will not have told you ownership of assets. You need to see documentary evidence of ownership of everything that you think that you are buying / taking over the lease for.

Don't assume anything. Get in writing exactly what you are buying. 

The above are just yardsticks and are not meant to be conclusive. They are just things to give you a feel for the business and pretty much the tip of the investigation iceberg.

My advice would always be to get a professional on board. Someone objective and independant of the purchase.

£1500 spent on an accountant looking at this now may save you much more than that if you are advised to walk away from this.

However, it could be that everything is completely legit in which case lets look at the next hurdle.

What collateral can you offer the bank? Rented Property and goodwill are not collateral. If things go wrong how will the bank get it's money back?

Banks are getting more flexible with their loan policies again but they won't loan money if they believe that they will not get it back. You need something of substance to offer... Personally I once offered my first born child but was informed that such is now against bank policy!

Also, if you fold the business how do you get out of the lease? is there a get out clause??? Something worth looking up there.

I wish you the very best with your venture,

Talk later,

Shaun.