ENSURE
The Goose Lays Golden Eggs!
What exactly is due diligence for buying a business? What do you need to look for? And what do you need to do? Mark Blomkamp explains.
Beyond just proving that the seller's financial information is accurate, this process allows you to look into the company and find out how it works, where its strengths lie, what weaknesses it has and how you can or can't make a difference as the new owner. A Pro Forma financial analysis should also be developed during due diligence to run best and worst case scenarios to get an idea of revenue and cash flow possibilities.
Basics To Look For Financials - Again, "official" financial statements such as tax returns with many small businesses usually give you a very small piece of accuracy. For the most part, the accuracy is in the expenses but even that may be off so as to not make the entire tax return seem odd to the government. Your best bet is the "true" books that most business owners keep. Some 10 Business Broker
use a notebook and some use a financial programme like MYOB or Quick Books. You should obtain a Profit & Loss (Income Statement) from their accountant as well as a Balance Sheet. In any business, especially highly cash based, get all of the bills and payroll information available for the past one to three years. At a minimum, this should tell you what the true company expenses are. Another thing you want to look for in this information is revenue growth vs. shrinkage in the last three years and whether profit margins are in line with industry averages. Keep an eye out for trends in Accounts Receivable (from the Balance Sheet) to see if they have too many slow paying customers or have been having trouble for multiple years in collecting payments. Find out what the typical liabilities and Accounts Payable are like. Are there a lot of big ticket items? Will you need to take over any payments for any loans or leases? What kind of cash needs to be laid out each week or month to keep the business going? Assets - Assets of a business vary by business type but the due diligence involved will be very similar regardless of the business type. www.linkbusiness.com.au
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imply put, performing your due diligence means taking a highly scrutinising look at the business you are wanting to purchase.