Researching the Business Assets, Competition, Products & Debtors
5d) Assets
Again, this is where your accountant will come in useful to put a value on any assets involved. It may be that the owner has used the buying price to value fixed assets such as vehicles and equipment and has completely ignored depreciation.
Knowing which assets are being sold with the business and those that the owner intends to remove from the deal.
Find out which assets are hire purchased (HP) or leased and that the owner has not included their value price as part of the net asset value. Those things that are HP or leased need to be investigated to create awareness of the rental price and the contract terms/conditions: there is no automatic right of lease/HP assignment on buying a business, and the present owner cannot sell or pass on goods that do not belong to them. If you are to take on, say, the lease for a commercial freezer, you must have the lease reassigned to you by the lease company. Informal arrangements between seller and buyer often end in grief, and you will never have good title to the goods.
If vehicles are included, are they fully paid for and are they suitable for the industry of the business. For an extreme example, cars would be no use if the business was a home delivery service. Cars and vans can be checked for outstanding finance by the HPI system: see our Internet and Technology Portal for more information.
Intangible assets: those things owned that are not physical, should also be researched. This includes goodwill (detailed later), investments, branding, patents and trademarks. Any investments that the business has (maybe in other businesses) need to be investigated and valued. If the business has any trademarks, are they registered and for how long? Be aware of any patents that the business may have. Make sure that you understand fully all the legal obligations of having them. If the owner has valued the patents and trademarks, have they given a reasonable value?
Referring back to the accounts, any values that the owner has given for the assets should equate to those on the balance sheet. Due diligence should compensate this. You should obtain a comprehensive report on the company’s trading performance. In situations where the assets need a professional valuation, your accountant has the experience to value most business assets.
5e) Competition
This is an area that if not investigated properly will more than certain cause the business to fail. It may be that the business currently has no or little competition, in which case you should analyze any potential competition for the future. To fight off a competitor you may have to price your products lower: make a number of calculated predictions and see if you will still make a profit with these changes?
In your investigation, weigh up all the pros and cons of each competitor. You may be able to find a way to exploit the cons of the competitors to your advantage.
It is also wise that you determine what percentage of the market share the competitors have which may show what you are up against. Do not restrict your search for competitors in too tight a circle around you.
Further investigate if any businesses in the industry have gone bankrupt because of the competition. It may be that the business you are about to buy is the next one to go down. Is there a place for your product in other markets that will lower competition in the short term?
5f) Product
Fully analyze all products to see which ones bring in the most turnover. Do all products contribute to the sales figures or are there certain ones that account for a majority of the sales? The profit margins on all products need to be brought to attention: it may be a case that the least popular product has a small profit margin and you may consider taking it out of production. Use your accountant to further draw conclusions on products as those that do not make sufficient contribution to profits may still 'balance the books'.
It may be that the pricing policy of the products is not best suited and that some products don't cover direct costs of producing them. By revising a more suitable pricing policy, you may be able to increase profit margins. Again, consult your accountant for advice.
Some of the products may be seasonal (i.e. they are only popular during certain times of the year) so you need to find out if the other products will compensate for this. Also, if some of the products are the latest fashion, is there sufficient product development expertise to keep up with any future advances?
You also need to be aware of the costs that are involved in producing the product. Investigate to see if there are any reasons for costs to rise or fall in the near future. This may include the price of raw materials or even the wages of production staff.
5g) Debtors (the people who owe the business money)
Some businesses may avoid having debtors or try to keep them to a minimum. Others may have a large number of them which account for a big proportion of the turnover.
Analyze all the current debtors to find out if they are reliable payers and also any potential debtors for the same reason. The main concern about the debtors is when will they pay back the money and how old are these debts? Those debts that are old are more than likely never to be repaid. It may also suggest that the business owner does not have a good collection policy in which case you should revise a way of improving this.
It is important to know which debtors owe the biggest amounts of money. Analyze these businesses/customers further to find out their credit history and ability to make repayments on time. To learn that the business relies on few customers that are bad payers will result in poor cash flow. You can obtain detailed company reports to help you analyze a business' financial position.
Once you have identified which debtors you are likely to recover outstanding payments from, you can suggest a more realistic value for this part of the business. It may be a better idea to draw a line under some customers and leave the recovery of these debts to the seller.
One of the key issues with customers is the 'Pareto Ratio' (or 80/20 rule). This relates to those businesses that have 20-percent of their customers representing 80-percent of the sales. This means that with the loss of one or two customers, you could loose 80-percent of your turnover. This also means that the remaining 20-percent are so labour intensive (due to smaller volume/size) that without the profitability of the bigger customers you will start to lose control of your costs very quickly. Do you want to buy a business with this customer structure? Do you want a large percentage of your revenue owed by so few customers, and thereby have the potential to bring the business down?.
BizHelp24 – UK business and finance information, news, help and services for small businesses BizHelp24 is a UK business and finance resource providing Small Business Help, Start up Information, news and services; for individuals and Sole Traders. Comprehensively covering a wide range of key business, finance, and service topics. Employment and personal information includes Work Times and Break Entitlement, Body Language, employee Holiday Entitlement and Employment Contracts. Credit Policy information includes Letter of Credit, useful Credit Notes, Business Loans. and Cash Flow Control. Other information areas include Bankruptcy, Homeworking, Business Failure, Company House and Company Names,
The free content within this entire web site is for information only.
The content is believed to be accurate, but only in general terms. Specific advice is needed for individuals & businesses.
ROK Connect Limited (Registered in England No.3573320) t/a
Biz Help 24 is registered with the
Data Protection Act 1998 No.PZ7082780
