Pro Going Concern

Considering buying a business?

While there is a constant stream of businesses coming up for sale, the tricky bit is knowing how to assess the best business opportunity. As long as you ask the right questions, it should be fairly straightforward. Here’s the good news. I’ve compiled some of those ‘right’ questions for you. Before making a final decision I encourage you to seek professional advice and carry out due diligence.

What are the demand drivers within the existing markets the business sells into or services? Is it discretionary spending or essential products or services? If discretionary – does their target market have discretionary funds to invest? Also what are the market trends?

Customer Risk
How is the business spread across its clients? Generally the wider the spread the lower the customer risk.

Service Business
Service businesses will have fewer issues in respect of supply chain considerations, but their use of staff and contractors will be critical components to review. Product Business
Is there diversity of product supply available? If not, is there sufficient “buffer stock” to see the business through difficult times? Who are the competitors and what are their strengths and weaknesses?

Any likely change or addition to the competitive environment – either by other providers of a similar product/service or a new generation product/service that could upstage demand for the target business outputs?

Review the historical acquisition and retention of staff – is there longevity or quick turnover? What is the essential culture of the organisation? Will your management style suit that culture? Is there a critical staff member that simply has to be retained?

Plant and Equipment
Understand the condition and market value of the business assets. What are the forecasted repair and maintenance expenses? What level of capital expenditure will be required to upgrade assets? Consult an accountant regarding depreciation considerations.

Check margin against stock turn – generally these figures have an inverse relationship i.e. high margins – low stock turn. Is there old or slow moving stock that should not be valued? Who has responsibility to move old or obsolete stock – vendor or buyer?

Systems & Intellectual Property
Is there measurable business goodwill as opposed to personal goodwill attached to the outgoing owner? Are there operating manuals? How long can the business operate without the owner?

Gross Margins
Can the business adjust pricing to reflect increasing wages and/or operating expenses? If importing, can product pricing be increased to offset increased freight costs and/or a declining exchange rate?

‘CIMITYM’ – Cash is more important than your mother. Is the business cashflow positive from day one or is there a need for significant working capital? This all impacts on the total cost of ownership.

Business Value
Does the business earnings multiple fairly reflect both historical and potential future trading? Does it take into account working capital, capital expenditure or cashflow requirements? What have businesses in the sector sold for recently?

Regulatory Environment
Are the rules about to change? Will the business be impacted by changes to local or central Government policies or budget changes to that sector? Will the regulatory costs soon increase (or decrease)?