Here are 10 vital financial tips for buying a competitor or a company you happen to like.
One of the fastest ways to grow is to buy a competitor. But, of course, you must exercise due diligence.
What’s more, here’s a caution: Historically, many mergers and acquisitions fail.
If the company you want to buy is not a competitor, you must understand the industry; make sure your acquisition has a compatible culture; and carefully evaluate the company’s financials.
In financial terms and to avoid any negative surprises, here are 10 crucial precautions:
1. Evaluate the company’s EBITDA
The prospective acquisition’s operational cash flow is important. Operational cash flow is an euphemism for EBITDA. EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization.
This is particularly important for companies with significant debt-financing liabilities or large fixed assets. It isn’t useful information for evaluating a small firm that doesn’t have big outstanding loans.
Fixed assets are items that have a long-term value, such buildings, computer systems, furniture and fixtures, land, machinery and vehicles.
The formula: EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization).
This helps for an accurate evaluation. Companies with large depreciation charges or intangible assets that take large amortization charges distort the true earnings picture.
2. Examine the firm’s accounting policies
You don’t want to buy a company that’s really a white elephant, which wouldn’t be a useful acquisition.
Review the business’s policies concerning revenue, accounts receivable and inventory records. This will help you to make certain of the company’s approach to value.
3. Contemplate the assets and working capital
Ask yourself if the company is sustainable. Evaluate the financials on revenue and margin trends. For example, look at the customer base, product lines, operations and distribution methods.
4. Asses the company’s tax situation
You must know the firm’s tax history and current liabilities. Check out the last five years of taxes, any audits, agreements with government entities and all correspondence on taxes.
5. Get input from each of your associates
Your team might consist of consultants, accountants, CPA firm, tax specialists, attorneys, as well as professionals in human resources and information technology. Ask for their analyses.
6. Look at historical profits (revenue minus expenses) and developing trends
You must forecast whether past revenue will be continued. That means analyzing specifics in product lines and customer sales.
7. Review the company’s intellectual property and technology
Consider any patents whether domestic or foreign. Don’t leave out copyrights or trademarks. Make certain of sole ownership that they’re not shared with other companies or individuals.
On the other hand, verify the company isn’t encroaching on others’ intellectual property and there aren’t any legal threats.
8. Review all debts
Investigate the debt situation. If there are debts, see if you can negotiate them out of the purchase agreement.
There’s a myriad of debts to consider — ranging from unique employee agreements and financial guarantees — to leases.
9. Analyze the company’s accuracy in budgets vs. forecasts
Ask to see previous forecasts and compare them to the results. Determine the company’s effectiveness in meeting targets. Why or why not?
This will help you evaluate the most-recent forecasts for viability. You might decide to back off or whether to negotiate more-favorable purchase terms.
10. Examine contractual agreements
Look at all customer, vendor, employment and any other contracts. That means all factors in costs, prices, expiration dates and control provisions.
From the Coach’s Corner, here are more due diligence tips:
If Mergers & Acquisitions Tempt You, Consult Your HR Pro First — If you’re contemplating a merger, be very careful about your human capital – whether you’re in the public sector, a small business or a global company.
HR Lessons from Failed Mergers of Canadian Businesses — Only 20 percent of Canadian mergers and acquisitions succeed, according to a survey of finance executives. Here’s why.
Financial Tips for Taking the Plunge to Buy a Business — So you’ve decided to take the plunge in buying a business. Congratulations. I salute such bravery. Owning a business represents one of America’s great fundamentals — our free-enterprise system. You’ll have multiple financing options.
7 Basic Questions to Ask Before Buying a Business — There are beneficial reasons for buying a business. It works for a person lacking business-ownership experience or a veteran business owner.
13 Strategies, Precautions When Expanding into a New Market — So you see opportunities by expanding into a new market. Whether you’re expanding across town or into a different region, there are risks to anticipate in alleviating any uncertainty. Even it doesn’t seem risky, due diligence is required and certain precautions are imperative for success.
“Care and diligence bring luck.”