In some cases, published numbers understate reality. Over time, certain assets of the company (buildings, machinery, rolling stock, etc.) have been fully depreciated on paper, whereas in reality, they retain a higher market value. Furthermore, for personal wealth or tax optimization reasons, certain private expenses may end up in the company's accounts (company cars, household expenses, salary of a non-active family member, etc.). Or the inventory may actually be higher than recorded on paper, having been excessively written down year after year.
In each of these cases, the seller or their advisor will need to make the necessary adjustments to the financial statements to properly reflect the company's value. These are primarily profitability normalizations, affecting all ratios linked to EBITDA, Cash Flow, and Net Income. Conversely, revaluing physical assets will directly impact the Adjusted Net Asset Value (Actif Net Corrigé / liquidation value). If the adjustments are clear and well-substantiated, the buyer will take them into account in their valuation model. In this context, it is often helpful to obtain a credible third-party appraisal (e.g., selecting a bank-approved real estate appraiser for property revaluation).
Unfortunately, it also happens—quite frequently—that the numbers overstate reality. Often unintentionally, minor oversights or accounting errors accumulate over time, eventually creating significant discrepancies between reported accounts and actual operational facts. These discrepancies can surface across various line items on the balance sheet.
Here are the main classics:
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Inventory: Inventory may contain "dead stock" (rossignols), a term well known to insiders referring to unsellable goods that are still recorded on the inventory balance at their original purchase cost.
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Receivables: Accounts receivable may contain "doubtful accounts" (créances douteuses) that should be provisioned. An aging schedule (balance âgée) allows one to spot clients who have not paid on time in a single glance.
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Litigation: Known legal disputes representing a financial risk to the company must also be backed by appropriate provisions.
A company acquisition is built on trust. Imagining that one can hide reality is often illusory and always dangerous. A prospective buyer first examines the balance sheet and the income statement. Then, they will want to verify the accuracy of the numbers presented. During the audit—the final step before concluding an agreement—the company is "laid bare." Experts verify accounting records, inventory, contracts, and more. If the provided information proves unreliable, the entire transaction process is called into question. Even if the discrepancy was unintended, the buyer may still be disappointed relative to their expectations.
Assuming one manages to "slip through the net," the risk remains after closing. Through representations and warranties (garanties d'actif et de passif), the buyer can seek recourse against the seller if certain assets were clearly overvalued or certain liabilities understated. Damages can potentially exceed the original purchase price...
Clarity, transparency, and the alignment of numbers with reality: these are the essential ingredients of a successful business sale. Take the time to properly prepare your transaction file alongside an experienced advisor who can make the balance sheet adjustments—both positive and negative—that will give your file credibility.
Illustration: Clou
