The initial thought that every budding businessman possess is of starting his own business right from the scratch. Giving freedom to these thoughts may attract certain difficulties like the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow, etc without having proper analysis and no established reputation.
Buying a business is often considered to be an easier approach both for the established or existing businessman and also for the fresh market entrants. This opinion is there because one is acquiring a business that is already generating cash flows and an adequate amount of profits. Apart from these monetary aspects involved other important areas of concern for anyone buying a business is knowing the customer base, reputation, etc and when an existing business is bought these areas of concern are already into existence as compared to establishing a newer one. This reduces the duplication of work because the most suitable norms and procedures are already set as per the nature of the business.
The buying process starts from knowing one’s interest. One must know and select an industry about which he/she possess the utmost interest, comfort and knowledge. After selecting an industry type the next step which comes into picture is the business. This should also be selected by keeping in mind various aspects like type of business, knowledge, etc. Also consider the size of business, in terms of employees, number of locations and sales. Next, focus on the geographical area where of the business as it should be as er the ease and choice of the businessman. Assessing the labour pool and the cost of doing business in that area, including salaries, wages and taxes is also important to make sure they’re acceptable. Once the most appropriate region is chosen and an industry to focus on, investigate every business in the area that meets the listed requirements.
Initiating any buying process there is a requirement of an “acquisition team”. This team includes buyer’s banker, accountant and attorney: to help in the entire process. This acquisition team helps in figuring out “due diligence”. It means reviewing and verifying all the relevant information about the business that the buyer is considering. Due Diligence helps in carving out all the necessary points involved in any buying process and creates a clear picture for the buyer. The preliminary analysis starts with some basic questions and these are as follows:
- What is the reason as to why the business has been put up for sale?
- What is the general idea of the industry and that business, and what is the scope in the future lying ahead?
- Can the business maintain or expand its market share in order to exist in the competition?
- What is the degree of requirements for raw materials?
- Has there been any changes in the companies product or service line in the past?
Apart from looking into the quantitative information about the business, buying a business also involves looking into the qualitative domains and they can be inferred by talking to existing customers, suppliers and vendors of the raw materials about their type of associations with the business, reaching out the Better Business Bureau, industry associations and licensing and credit-reporting agencies to make sure there are no legal claims or complaints against the business that the buyer is intending to purchase.
Once the business stands appropriate as per the preliminary research conducted, buyer must look forward in respect to the functions of the business and its asking price. The methods opted in for ascertaining the further aspects must be inclusive of the mentioned points:
- Business’s financial status which includes its earnings history and growth momentum it has in respect to the future.
- Intangible assets of the potential business (for example, brand name and market position).
To get into the steps of analysing the depth of the business the buyer should ask the accountant of the potential busines to provide him with the sources like projected financial statements. These financial statements include balance sheets, income statements, cash flow statements, footnotes and tax returns as they are the best mirrors to business’s financial status. This will help in knowing the unknown or not easily viewed aspect of the business and the buyer will find it easier to make his decision based on the results of analysation conducted on these financial statements.
These financial statements involve balance sheet and this balance sheet depicts the financial position of the business. This balance sheet includes information of all the assets and liabilities of the company. Assets include stock or inventories, leasehold improvements, furniture and fixtures, land and building, accounts receivable and supplies of the business. Goodwill cannot be considered as an asset as such. Liabilities include the business itself. Anything that the business owes to the other party is can be put under the category of liabilities. The business buying decision will solely depend upon the return on investment the buyer is getting on the purchase of the same.
All the decisions take a back seat and the most important concern for any buyer of a business is knowing the price he has to pay to acquire that business. Both the buyer and the seller have different perspective of the business’s worth and the one who has a strong point will have an advantage over other at the time of negotiating the deal.
In buying a business, price is a very crucial element in any acquisition or merger and this price is affected by certain factors like the prevailing economic conditions like for instance the business price is higher when the inflation is prevailing in the country and vice versa, The price will also be affected by financial stability of the individuals involved in the entire buying process. Suppose if the seller shows his weaker side, the buyer will utilize this situation fully and will leave no stone unturned.
The next step after the price element is hoe the deal is taken forward by both the parties. For an individual who is purchasing a business has two options for processing the deal plan. The first is asset acquisition. In this method the assets that are only required r the buyer is interested in is bought or acquired by the buyer. A positive side of this plan is that the buyer need not indulge into legal liabilities which comes in buying the business because only the assets are being bought under this method of acquisition. The flip side to it is that the seller might try to set off his losses in this asset to asset deal.
The second plan that the buyer may adapt is stock acquisition. In this the buyer purchases the stocks of the business and this means that all the assets will be transferred to the buyer and the liabilities are assumed to be the responsibility of the buyer only.
After all these procedures are followed, the buyer along with the acquisition team should very minutely assess the intentions of purchasing the business by keeping in mind all the respects like financial stability, tax structure or incidence, etc. Then after a structured contract should be made which is inclusive of all the clauses and is legally viable. The clauses must be in favour of both the parties involved and to their benefit.
About the author:
Mervyn Aranha is a Business Analyst – Transactions at Kapso Business Services, India’s Leading Business Brokerage firm.