You have seen a business you want to buy… all good, you like what they do, you have the skills to do it, you want to know more, you get the financials and have a chat to the current owner. “Profits are up 5%on last year… The staff are not interested in taking long service leave… No bad debts… With a new person in charge, who knows what’s possible!”
Reason for selling? “Time to retire…” it all sounds so good, until you dig deeper, here are some tips on things to look for when evaluating a business to purchase.
- Renting – Is the current price per month about to go up but no one is saying anything. That 5% profit on the previous year might dwindle fast
- Profit – It’s up from last year… but how much was it to begin with? If it was only 2% before hand then it’s not much of a rise, unless the profit amount in dollar terms is quite high, that might be different. BUT what if the profit expressed in dollars is low? Let’s say it’s $10,000 per anum on average over the last 5 years, that’s probably not much, unless the owner is paying themselves a huge amount for some reason and then the profit could be low.
- Cash at hand – Oh look, there’s cash in the bank, well the current owner may take that with them… perhaps ignore it as some form of bonus, but deduct it off the price you intend to pay
- Valuation of the business – Get an accountant to have a look at the figures and have them point out any glaring anomalies. A good profit on paper, might just equate to covering the amount the owners should pay themselves, but have not been paying themselves wages. Therefore what looks good now might be a big disappointment
- Assets – Are they really worth what is stated in the figures? Will you want to update some of the assets… It starts to get trick folks. Stock at hand, what if most of the stock is out of date or they are items people don’t want to buy any more. You might end up throwing this stock out, then there would be replacement cost for useful items.
- Systems – All the simple processes and procedures that get used to make things easier, how do they run their database? Are there quality processes and or assessment methods in place to measure the quality of what you get, sell etc.
- Staff – Grumpy, underpaid, wanting to get a new owner who is cashed up so they can take long service leave, cashed up so they can sue for breaches of Workplace Health and Safety issues, cashed up so they can trip up and claim compensation, the list could go on. Then you find out they have been on the wrong pay scale and are wanting pay rises. So you know all that but you figure you can turn them around and create a new culture of happy committed staff, chances are hell will freeze over first! Changing a dud cultire is like trying to turn a cruiseliner around it takes a lot of effort to do it, then by time you do it the territory you ended up at now looks totally different…. That’s right you are now facing the worng way. 🙁
- Customers – You find them leaving the business in their droves, it turns out they loved the way the previous owner did things, now they are off to find a new supplier. The truth be known, they probably just didn’t like the new pricing you introduced, after all you wanted to up the profit margin
As you can see it can be a minefield, make sure you do your due diligence, be thorough and ask LOTS of questions. Once the deal is done, the last thing you want is BIG surprises.