This is the first in a series of posts for business advisors and business buyers on what to look for when buying a business – over and above the financials. These posts are equally relevant for people selling their business as it indicates areas they may need to work on and areas that affect the value of their business!
There is a tendency for business advisors and consultants (and business buyers themselves) to focus on just the financials of a business; however, there is a wealth of other business information which advisors should understand, in order to properly advise their clients….
I’m not sure how much advisors want to get involved in analysing business opportunities for their clients or how much detail they want to be involved in, so I have written these posts as a series of questions which a buyer needs to ask for himself or have an advisor ask for them.
I’ll begin by setting the context and start with a few definitions.
When I refer to a business I mean a profitable “going concern”. We typically sell “going concerns” in the price range of $200,000 to $10 million. Furthermore, around 99% of the sales we facilitate involve the transfer of assets from one legal entity to another and not the sale of the shares of an entity. This is generally seen as the cleanest and easiest way to do things in the majority of cases and the buyer knows there will be no overhanging lawsuits, tax problems, environmental issues etc. Most buyers want a clean start.
Occasionally, there are situations where it is more advantageous to one or both parties for the buyer to buy the company. Each case needs to be judged on its merit as it can affect tax, stamp duty, transfer of licenses and accreditations, and liabilities and risk. Both parties need to seek expert advice relating to their situation.
In a typical business sale, the assets which the buyer is buying are the plant & equipment, stock and goodwill. In effect, the buyer is buying some tangible assets and a profit stream based upon the past history of the business and the risk against that profit continuing in to the future. The value of the business, therefore, is based upon financial or tangible factors and non financial factors, many of them intangible (for example, goodwill).
In this series of posts, through necessity, I will be talking ‘generalisations’, whilst in the real world every case needs to be assessed on its own merit. There are far too many permutations to be covered in a post like this.
In the next post, we will look at how a business is appraised for sale and what a business is worth?
For details of my next workshop on buying and preparing businesses for sale, CLICK HERE