The short answer: verify the free cash, not the balance
Yes, you can verify the cash in a children's home company before you buy its shares, and the whole point of doing it is that the bank balance on its own tells you almost nothing. A share purchase buys the company that owns the account, which means you also buy everything already owed out of that account. The number you actually need is the free cash: what is left after the money that belongs to councils, staff, suppliers and HMRC has been taken out.
Get this wrong and the damage is quiet but real. You agree a price that treats a healthy looking balance as surplus, complete the deal, and then discover in the first fortnight that most of it had to go out on a payroll run, a VAT payment and fees that were really advance income for placements you now have to deliver. The cash you thought you were buying was never free.
LOYALS is a King's Cross firm of accountants and business consultants that verifies acquisition balances and runs the finance function for children's home and care groups across London, so this guide is written around the decision a buyer has to make at completion, working alongside a management accounts team and your solicitor rather than from the textbook.
Shares or assets: does the cash even come with the deal?
Before you verify anything, be certain which kind of deal you are doing, because it decides whether the cash is yours at all. On a share purchase you buy the company itself, so its bank account, its Ofsted registration and its debts all travel with it to you. On an asset or trade purchase you buy the homes, the goodwill and the contracts, the seller keeps the company and its cash, and you register with Ofsted as a new provider in your own name.
That registration point is easy to miss and expensive to get wrong. Ofsted's guidance on how groups of children's homes work notes that Ofsted must be told when a home changes hands, but that it is "sometimes only through our regular research through Companies House that we become aware of further consolidation" when a parent company acquires a provider. A share purchase keeps the existing registration intact because the registered provider, the company, has not changed; an asset purchase means a fresh application, and the children's home registration guidance will then want a business plan, a cashflow forecast and, for an existing company, the last two years of accounts before it registers you.
So the shares route is usually faster to operate because the registration continues, but it is where cash verification matters most, precisely because you inherit the balance and everything pulling against it. The assets route sidesteps the inherited liabilities but puts the registration, and the funding of your own opening cash, back on you. Our view for most group buyers is that a share purchase is the cleaner continuity play when the target is already running well, provided the balances are verified properly first; if the records are a mess or the liabilities are uncertain, an asset purchase can be the safer structure even with the re-registration cost. Your solicitor leads that call, but the financial verification is what tells you which risk you are actually taking.
Why the bank statement is not all yours
A children's home company's bank balance is one of the most misleading numbers in the whole deal, because so much of it is money that is already spoken for. Unlike a shop that banks what it sells, a care provider is usually paid in advance by local authorities for placements, holds money it will have to hand back, and carries payroll and tax obligations that dwarf a typical small company's.
Start with the income. Councils and placing authorities frequently pay children's home fees weekly or four-weekly in advance, so on any given day part of the balance is cash received for care you have not yet provided. If you take over mid-period, you inherit the duty to deliver that care, so that slice of cash is not profit sitting there for you, it is a liability you are about to work off. Treat it as free and you have paid the seller for money you will spend running the placements they were already funded for.
Then the amounts already owed. Company debts belong to the company as a separate legal entity, and HMRC's director information hub on company debts lists PAYE, National Insurance, corporation tax, VAT, supplier bills, unpaid wages and company loans as debts "taken on in the name of the company". On a share purchase those do not disappear when ownership changes; they stay inside the company you now own. The next payroll, the next VAT payment and the corporation tax accrued on this year's profit are all waiting in that balance even though they have not left the account yet.
This is why the records matter as much as the statement. A limited company must keep records of money received and spent, what it owns, what it owes and what is owed to it, and must keep those accounting records for six years, with HMRC able to fine a company 3,000 pounds for failing to. Those records, reconciled to the bank statements, are what let you prove how much of the balance is genuinely free rather than taking the seller's word for it.
The chart above is an illustration, but the shape of it is what we see again and again: a reassuring headline number, and a free cash figure underneath that is a good deal smaller once the advance income, the deposits and the tax are pulled out. The exact split is specific to each company, which is the reason verification is a job and not a glance at the last statement.
The worked checklist: from bank balance to free cash
Here is the verification laid out the way we actually work it, using round illustrative numbers for a single target company. The job is to move down from the headline balance to the free cash, taking out each amount that is restricted, prepaid or already owed, and keeping a note of the evidence that supports every line.
Acquisition opening cash verification checklist, illustrative figures for one children's home company at completion:
| Line in the balance | What it really is | Amount |
|---|---|---|
| Bank balance at completion | The headline figure on the statement | £420,000 |
| Less deferred council income | Placement fees paid in advance for care not yet delivered | (£120,000) |
| Less PAYE, NIC and VAT due | Payroll taxes and VAT building towards their payment dates | (£55,000) |
| Less corporation tax accrued | Tax on this year's profit, not yet paid | (£40,000) |
| Less supplier payment run due | Agency staff and suppliers payable within days | (£40,000) |
| Less deposits and retentions held | Money the company must be able to hand back | (£15,000) |
| Verified free cash | What is genuinely available to you | £150,000 |
Illustration, not client data. Every bracketed line needs its own evidence: council remittances and rotas for the deferred income, HMRC statements for the tax, the aged payables list for suppliers, and the tenancy or deposit agreements for retentions.
Work top to bottom and two things happen. First, a balance that looked like 420,000 pounds of surplus becomes 150,000 pounds of genuinely free cash, which is the number the price should be built on. Second, you end up with a schedule your solicitor can use directly: each deduction is a liability to be covered by a warranty or a completion adjustment, and each piece of supporting evidence is something you can ask the seller to stand behind. The deferred council income line is usually the one buyers underestimate most, because it looks and feels like cash in the bank right up to the moment you remember the placements still have to be staffed and delivered.
One caveat worth stating plainly: these figures move daily. A balance verified a fortnight before completion can be materially different on the day, especially around a payroll date or a council payment cycle, so the reconciliation is pinned to the completion date itself and not to whatever statement happened to be handy.
Which cash figure can you actually rely on?
Only one: the completion-day balance that has been reconciled and verified. The other figures floating around a deal are each unreliable in their own way, and knowing why keeps you from anchoring the price to the wrong one.
The last filed accounts at Companies House are the most official looking and the least current. A private company has nine months after its year end to file, and annual accounts describe a single snapshot date that can therefore be the best part of a year behind by the time you read them. A placement won or lost since then, a council that changed its payment cycle, a large capital spend, any of these moves the cash, so the filed figure is history, not a completion position.
The seller's own management figure is more current but it is unverified, and it is usually presented to support the price rather than to test it. It may be accurate; it may also quietly include the advance council income and the undrawn payroll as though they were free. Treating it as fact is how buyers end up paying for restricted cash twice.
Set the three side by side and the point makes itself. The verified completion figure is the only one that reflects what is actually in the account, net of what is owed, on the day you take control. It is also the only one both sides can stand behind, which is why share purchase agreements fix a mechanism for it: either completion accounts drawn up just after the deal to true up the price, or a locked box where the price is fixed to an agreed earlier balance sheet and the seller promises no value leaked out in between. Either way, the free cash has to be measured, not assumed.
How the verification is done before completion
Verification is financial work that runs in parallel with the legal work, and keeping the two jobs clear is half the battle. We reconcile the completion bank balance to the accounting records, separate the restricted and prepaid amounts from free cash, confirm the PAYE, VAT and corporation tax position against HMRC rather than against the seller's spreadsheet, check for undrawn but committed costs such as a pending payroll or supplier run, and flag any balance that is not supported by evidence. Your solicitor takes those numbers and turns them into the completion statement, the warranties and the indemnities.
The split of who does what is worth setting out before anyone starts, because deals stall when it is assumed rather than agreed.
The reason an accountant is in this at all, rather than leaving it to the lawyers and the bank statement, is that the restricted and prepaid amounts are invisible to anyone not reading the ledgers. A solicitor drafting warranties needs to be told that 120,000 pounds of the balance is advance council income; they cannot infer it from a bank statement. Equally, the accountant does not draft the indemnity that protects you if the figure was understated; that is the solicitor's work. The verification produces the numbers, the legal drafting allocates the risk, and the two have to talk to each other.
For a group buyer there is a continuity prize here too. The same reconciliation that protects the price becomes the opening position for the acquired company's first set of management accounts under your ownership, so the verification work is not thrown away at completion; it seeds the reporting you will run from day one. That is the point at which an acquisition stops being a one-off event and becomes part of how the group is run.
If you are a children's care group weighing up a share purchase, the practical help is the same whether the target is one home or several: verified opening balances before you sign, and a finance function ready to pick the company up the moment you own it. LOYALS acts as the outsourced finance team for children's home and Ofsted-registered groups, and our management accounts service can verify the acquisition balances alongside your solicitor and then run the invoicing, payroll and monthly reporting for the home afterwards, so the responsibility for the numbers never falls into a gap between advisers.