Whether you already own a business or are thinking of becoming your own boss, buying an established company may seem tempting.
After all, the firm already has a client base, maybe known for its products or services and has lots of infrastructure already in place. But is it a wise buy?
Some years ago, a business associate mentioned being approached by a client who was offered the opportunity to buy a business. In their eyes, it was a perfect chance to turn the company around and grow it further.
From the outside it looked like a great business. But further examination of the figures showed the almost seven-figure value its owners gave it was nowhere near what it was really worth. In fact it was in the low five-figures area!
Without an expert eye, this associate may have bought a business that left them in so much debt they had little opportunity of making it a success.
Using an accountant if you’re buying a business
If you are considering buying a business you do not legally need to use an accountant. But without ‘due diligence’ you could be making a mistake.
Due diligence is simply, according to the Cambridge Dictionary, ‘a detailed examination of a company and its financial records’.
If you believe you can value a business purely from its ratings on social media or past turnover, then you need to remember due diligence.
Remember the saying, turnover is vanity and profits are sanity. Here’s how they differ.
An accountant is ideally placed to interpret the figures on various paperwork, including balance sheets and profit and loss statements.
What the numbers tell you
Part of the due diligence process includes looking at all the financial information that has been provided. The business associate I mentioned earlier had completely overlooked the fact the numbers were all ‘rounded’ and ended in zeros.
Immediately, this instigated questions from an accountant because it was difficult to know just how true they were. With goods being bought and sold it was extremely unlikely that all the figures would end in zeros!
Accountants will notice the numbers, which reveal a lot about a business.
For example, the directors selling the business have recently sold a lot of goods with a big sales event. Those turnover figures may look tempting! But an accountant is trained to look further back and work out if this is just a one-off.
Remember, the value of a business is based on future earnings, not past ones. Analysing the numbers determines whether revenue is growing or declining. Also, if costs are increasing, there might be lower profits in future.
Do the numbers add up?
A seller may have a story about why they are selling their business. If they say it’s due to ‘family reasons’ you may think you’re getting a bargain. But the numbers may not add up!
Using due diligence reveals whether the numbers are telling a different story. If the business is loss making and has been for some time, that is more likely to be the real reason for its sale.
Running costs
An accountant is best placed to understand the costs of running the business. The associate I’ve already mentioned explained that the company they were offered had tremendous turnover figures. But the running costs were eating into profits to such an extent they were virtually making any profit.
As the running costs were not on the profit and loss statements, they had missed how many company vehicles were on lease and were due to be replaced as leases were coming to an end. The future costs of replacements were likely to be a lot higher, wiping out more profits!
Make a sound decision
Once you have all the facts, you can decide whether to buy a business. If an accountant notices the business is not as valuable as expected or there are future issues, you may decide to take their advice and not proceed.
No matter what your decision, it’s best to be fully aware of the situation in advance so you don’t get any unpleasant surprises.
If you are thinking about buying a business and need the advice of an accountant, you can contact our team today.