If you are planning to purchase an existing business rather than starting from scratch having, completed some initial research to get familiar with the business which you will buy. After completing your research and the results look positive about the future of the business, you will ask your acquisition team to examine the potential returns and the asking price of the company. Although there are different methods to judge the fair market price of the business, you must choose one that considers the financial health, earning history, and the intangible assets of the business.
Ask the owner to show you the financial statements, cash flow statements, and the tax returns of the past three years, which will give you a clear indication of the financial health of the business. Let us take a look at some of the factors that may impact your financial management plan in some manner.
1. Excessive Inventory:
If the business that you are purchasing is product-based, you should be cautious when dealing with inventory. Buyers are heavily influenced by the inventory, which might prove to be a trap if you are not careful with it. Excessive inventory may be redundant to your needs or may become soon but will cost you a lot of money to store and insure it. Having excessive inventory may not be a good thing at all since it can be useless, but costs will be high to store and protect it. It can also indicate that the company cannot serve the customers on time since the time difference between the order and delivery of the product is considerably high.
2. Minimum Inventory carried by the Business:
You should calculate the minimum inventory required by the business to continue its operations. After you have calculated the amount, you can convince the seller to decrease the stock to that level when you are about to officially take over the firm. Another thing that you can do is to add a clause in the contract that you will only buy the inventory that is current and saleable.
3. Accounts Receivables:
Revenue left uncollected has the potential to stunt the growth of a business and may cause you to seek a business loan from Fast Capital. You need to carefully analyze the variables such as accounts receivables, schedules for cash collection. Remember to evaluate why the business fails to collect their revenues before you go and buy the firm.
4. Net Income:
Putting into the use of certain income ratios, you will be able to get a clear indication of the outcome of the business. Different rates will help you to calculate the profit margin, potential return on assets. Your accountant can advise while you are interpreting these ratios. While analyzing the profits of the firm, confirm whether the income is before or after tax. Also, check how much the owner will earn from the business to get an understanding of what to expect. Make an estimate on whether the expenses would remain the same, rise and decline when you take over the company
5. Working Capital:
If you don’t remember what working capital is, then an easy way to remember is that it is the difference between current assets and current liabilities. If the business is struggling to maintain sufficient working capital it will result in the business struggling to stay afloat. You can analyze the net sales and networking capital to efficiently calculate the working capital being used to achieve your business objectives.
6. Sales Figures:
Sales may appear to be far rosier than they are in the income statement. When analyzing the growth levels of sales and revenue of the company try to find out if the growth achieved is due to increased volume or the high prices the company charges. You can also see the trends going on in the market. If the market has become saturated due to high competition, your sales figures are likely static which is probably why the owner is looking to sell the company.
7. Fixed Assets:
While conducting your research, suppose you found that the business has invested heavily in long term assets such as property, plant, and equipment. You need to find out the reason why this has taken place. Perhaps, the owner was looking to expand having misread the market until seeing the potential rise in costs forced him not to consider acting upon his idea.
8. Operating environment:
The final thing you should look at is the working environment of the company. If a business has specific levels of dependency on oversea clients or suppliers, you must keep in mind the long-term political environment of the two countries involved. Another point to consider is the products that the company sells. With some products in high demand, reviewing current market trends will allow you to understand the prospective future of your industry. You also need to keep in mind the primary clients that the current company is in business with. Whenever a company is subject to a takeover, the stakeholders show concern. If the company relies on a few major clients, do you think they will be engaged with you once you close the deal? Such things have the potential to impact your financial planning at some level.