Assessing a Business’ Finances
Study the Seller’s prepared pack in detail. This should, at the very least, include the last three years’ Profit and Loss accounts, the last three years’ Balance Sheets, and projections for at least one year.
Focus on the financial information which needs to be analysed carefully and in detail. Normally, the first two years will be ‘audited figures,’ whilst the third year will be management figures. These are normally easy to check, but one has to be aware of anomalies that may be indications of details that may require additional investigation; this includes things like rising turnover with a slower rise in profits. That said, sometimes there are benefits to purchasing a struggling business.
Harder however is the subject of projections, which will inevitably be aggressive, ambitious and sometimes even over-inflated. Because they refer to the future and what is ‘projected’ they cannot be fully proven or disproven. Arguments on how these projection figures were reached are commonplace, and will often have a bearing on the purchase price negotiations.
Contact us for early advice on how to move forward and we will help get you in pole position to buy the best business for your needs and your future.
How to Go About Buying a Business
One suggestion will normally be to buy the assets of the business, rather than the company itself. The reason for this, is that companies often come with baggage; perhaps a tax issue that has not been resolved, litigation from a dissatisfied customer or competitor, or a pending tribunal with an ex-employee who felt they were unfairly dismissed. The last thing you want as a potential purchaser is to be forced to deal with historical issues.
Research the Industry
In addition to studying the ‘Sellers Pack,’ conduct the necessary research around the current state of the industry in question, the location and any potential developments pending. It also helps to talk to suppliers and customers of the business, although doing so will require the agreement of the seller, which is usually not forthcoming.
It is also helpful to talk to key employees, but whether you will be allowed to do this will depend on whether they have been made aware of an impending sale.
After the first round of analysis of the business and its wider industry is complete, including research, meet with the Sellers and discuss everything you want clarified. Any areas of concern should be raised at this point, so that they can be used later to explain why your offer price is lower than the asking price. After this meeting, you should be in a position to form an initial view on whether you wish to continue the discussions. If the answer is yes, let your accountant and lawyer begin their process.
Due Diligence When Buying a Business
All the verbal discussions you have with the business you are looking to buy are useful. However, in particular when it comes to the Sellers, one needs to understand that not everything said in the course of the discussions may actually turn out to be totally accurate and it is almost impossible to argue afterwards that particular details are not exactly as an earlier conversation indicated.
This is one of the main reasons Advice to Buy exists. At this stage, we put together a long list of questions for the Sellers for you, the business buyer. Their written responses can become part of their contractual obligations and this is very important, as in many instances, without a specific question, they will say nothing on a sensitive subject, nor are they obliged to do so.
Then, if things are looking positive, you should be working on the finances of the deal. If you need to borrow part of the funds, you should approach a lender to ensure you will be able to finance the acquisition.
Your lawyer needs to ensure all the available contracts are checked. Of particular concern are any leases on premises, where it is critical to ensure that the lease is transferable. Contracts of employment are also important, but if an employee wants to leave because of the change of ownership, there is little one can do. The best approach is direct conversation to try and build a rapport.