Purchasing a Business – checklist when analysing financial statements

[JacquiPryor]

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A couple of the linked ‘check lists’ for DD mention Intellectual Property assets… undoubtedly I am biased here, but it’s an important part! To conduct proper Due Diligence before purchasing a business likely involves several professionals. Certainly (in my opinion) an accountant (to help review, assess and summarise financials) and/or potentially valuation firm to give independent valuation; IP expert (perhaps several) to check what IP assets are registered (if not registered, could diminish value of those assets) and a solicitor to review/draft agreements etc. For some cases you might need more input, for others maybe not that much.

[USER=79642]@Tact[/USER] – sorry, I am pulling you into this comment as you’ve given very good information above – but am truly curious from an accountant’s perspective as to if/how you go about the intangible assets in your business purchases work? (seriously, not being at all critical as you have given great tips above… truly just curious!)

[jlev]

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Tact, post: 263244, member: 79642 wrote:

IRR

Hi Tact – what does IRR stand for please?

Thanks Tact and everyone else too for your contributions. I’m taking them all on board. Someone above mentioned “gut feeling” and I think what I want to do is translate that gut feeling you get from looking at the figures into something more formulaic.

[Peter – FS Administrator]

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I vaguely remember IRR from my study days, “Internal rate of return is a metric used in capital budgeting to estimate the profitability of potential investments.” But my grasp on how to calculate it is getting looser by the year!! Hopefully some more finance types will have something more helpful

[Paul – FS Concierge]

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jlev, post: 263282, member: 100774 wrote:

Hi Tact – what does IRR stand for please?

Thanks Tact and everyone else too for your contributions. I’m taking them all on board. Someone above mentioned “gut feeling” and I think what I want to do is translate that gut feeling you get from looking at the figures into something more formulaic.
That is a decent approach – you will find some checklists on business broker sites.

It is just as important to keep in mind that different businesses have different requirements and those differences are not always captured on a checklist.

Industry benchmarks are also very useful for this reason.

The other big intangible is that the quality of the seller has a lot more to do with a business sale than most other types of sales because the vast amount of variables that go into what makes up a business are not present in other types of sales – ultimately, you have to believe or not believe what the seller is presenting and the answers to you question or apply some sort of risk valuation to the overall transaction.

Like others, I agree that seeing actual bank accounts is very important in the due diligence stage and also calculating your cashflow requirements and being able to fund them in the first 6 to 12 months is very important.

Please ask if you have any specific questions you need answered.

Cheers

[businesstrade]

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It’s always best to get a professional when it comes to financials, especially if you don’t understand them well. It is especially the case when you are dealing with a larger company/acquisition cost – the risks are magnified and therefore it is prudent to do proper DD.

businesstrade.com.au - buy or sell a business

[James Millar]

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BusinessTrade, post: 263955, member: 113709 wrote:

It’s always best to get a professional when it comes to financials, especially if you don’t understand them well. It is especially the case when you are dealing with a larger company/acquisition cost – the risks are magnified and therefore it is prudent to do proper DD.

The challenge (a point Bert has raised on several occasions) is that there is a very wide spectrum of “professionals” whether it be with numbers, legals docs, consultants. The result is that say 50% of these “advisers” probably have no more capability than the average small business operator – and yet you will pay handsomely to learn that lesson. Not surprisingly this creates a degree of cynicism towards advisers and professionals – which is very unfortunate because there are some that can add a lot of value and have a very big impact on the performance of your business.

I’ve said it a million times before (I sound like a doctor telling people to get their moles checked) – invest in the right professional advice because it could be make or break.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

[businesstrade]

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JamesMillar, post: 263958, member: 5318 wrote:

The challenge (a point Bert has raised on several occasions) is that there is a very wide spectrum of “professionals” whether it be with numbers, legals docs, consultants. The result is that say 50% of these “advisers” probably have no more capability than the average small business operator – and yet you will pay handsomely to learn that lesson. Not surprisingly this creates a degree of cynicism towards advisers and professionals – which is very unfortunate because there are some that can add a lot of value and have a very big impact on the performance of your business.

I’ve said it a million times before (I sound like a doctor telling people to get their moles checked) – invest in the right professional advice because it could be make or break.

100% agreed. Getting quality help is definitely not easy to find and always worth keeping once you find it.

businesstrade.com.au - buy or sell a business

[Johny]

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The problem with this

” invest in the right professional advice because it could be make or break.”

is that, as true as it is, it is a throw away line.

Or to put it another way – What is the right advice? To which the answer is, “it depends”

I recall back in my old banking days. I gave a loan customer “the right advice” for their situation. They hated my guts and would have transferred their business elsewhere, but noone would take them.

Six months later, after they saw how, what I had arranged was working, I was the greatest guy in the world.

You only know what you know. That goes for us all – even advisers.

[James Millar]

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Johny, post: 271076, member: 34822 wrote:

The problem with this

” invest in the right professional advice because it could be make or break.”

is that, as true as it is, it is a throw away line.

Or to put it another way – What is the right advice? To which the answer is, “it depends”

I recall back in my old banking days. I gave a loan customer “the right advice” for their situation. They hated my guts and would have transferred their business elsewhere, but noone would take them.

Six months later, after they saw how, what I had arranged was working, I was the greatest guy in the world.

You only know what you know. That goes for us all – even advisers.

Perhaps in some professions but less so in compliance based industries like taxation. The right advice in my line of work is that which is accepted as legally compliant by the governing authority (the ATO or various State Revenue Offices or ASIC) and if there is a disagreement – the view of the court. The ATO does occasionally interpret the law or the facts incorrectly and the best advisors know when to fight and when to fold (and when / how to avoid a fight in the first place).

The real difference is in the approach taken. If you compare a low-cost accounting firm/tax factory that treats your taxes as a simple widget versus say a high-quality accounting firm that deploys a team to assist you (with year in year out continuity), has multiple structured tax planning engagements for your entities before the end of each year, has regular collaboration with you to avail themselves of your circumstances at all times, invests heavily in technical training to have the latest knowledge (and tax-saving opportunities) and on any given day is readily available to speak with you and help solve a broad range of financial issues.

So yes in many cases the lack of timely, compliant, and optimal tax advice (that which produces lower tax burden) is ..make or break.

Case in point. I recently spoke with a business owner about the various Government stimulus measures (not a client but was offering some pointers to them). They had a very good business but like many was effected by covid with a decline in revenue in and around April 2020 of not quite 30% as it turns out. Their accountant was missing in action (a term we use for accountants not helping their clients) in late March early April and this business owner could not quite navigate all of the nuances of the JobKeeper tests themselves – fair enough that’s why you have an accountant. Preliminary off the cuff advice from their accountant in early April was that they were not eligible for JobKeeper. They had 14 otherwise eligible employees. I asked what process was followed in early April specifically to forecast the likely April decline and she said none because the accountant simply said them monitor your revenue for a 30% decline and enrol if you pass. Well, April was the only month close to 30% and the rest were 10% or so. Fast forward to my recent discussions with them in September and I enlightened them about the requirements around the forecast decline in revenue aspect that likely could have been used in early April to pass the tests and access the entire 6 months of JK payments. So they likely missed the entire jobkeeper subsidy of around $250k because of a failure to correctly collaborate and get the best outcome.

Is this pure professional negligence?
Is there contributory negligence?

In any event a massive missed opportunity and dare I say possibly not that uncommon.

Will missing out on $250k “break” their business? I don’t know. It’s certainly a lot of money and would have been helpful in these times.

Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900

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