This is the last part of a series of posts discussing what potential buyers review when considering a business for purchase. This will help potential buyers, as well as potential sellers looking to spruce up their product.
Prior Year Financials. If possible, get financials from the business going back five years or even longer, if available. Check all of the ratios for trends. Look at all the financial ratios discussed in the prior posts to those throughout the industry to see how this particular company is performing. Are things getting better, or worse?
Sales Detail. If possible, find out who’s buying from this business. Are there a lot of first-time buyers? A number of regular buyers? Or are there only a few buyers? Large retailers have been known to pick small suppliers and become their number-one customers, only to later squeeze those retailers for smaller margins, effectively putting those vendors are out of business. If this company has all its eggs in one basket, walk away.
Accounts Payable. Who are the vendors and suppliers this business is using? What are their payment terms? How do those terms compare with the accounts receivable terms, and how well clients are paying their bills? Even if a business is profitable, cash flow is important, so if money is going out faster than coming in, walk away.
Cost Detail. If possible, obtain detail of the specific costs the firm incurs to do business. How are they spending their money? What are they paying their employees? Are the employees’ salaries competitive with similar businesses, or are they overpaying (or underpaying) their staff? What are they spending on sales and advertising? Again, is this competitive in the industry? Consider the expenditure detail and what you would change upon purchasing the business. Are your planned changes something the business – and its clients – would accept and survive?
Location, Location, Location. Just like any good piece of real estate, a business is dependent on the local area for its value. How is the local area doing financially? Are people moving in, or are they leaving? Of course, this isn’t important for all businesses; for example, if most sales are made online and shipped far from the home office, location isn’t quite as important.
Business Valuation. You should seek the help of a professional to perform these evaluations, especially if you are new or unfamiliar to the industry this business is in. Consider enlisting a business broker, someone who makes his living buying and selling businesses (much like real estate). Alternatively, consider a CPA who is certified in business valuation.
Why is this business selling? This is perhaps the most important question to ask of any business that’s up for sale. Why are they looking to sell? Is the owner simply looking to retire, or are they seeing negative trends that have told them it’s time to cash out and run?
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