TO BUY OR NOT TO BUY
Buying a business can be a boost to your business, but how do you know whether you’re buying a pearl or a pup, asks Mike Collins
The last issue of Product Media included a look at the challenges and opportunities of growing a business through acquisition, or in simpler terms, the merit of buying and selling businesses. In our position as ‘financial expert in residence’, let us help guide you through some thoughts on the buying process and relay a few recommendations as to the correct actions to take:
Previously we’ve reiterated over and over the virtues of completing diligence on companies that you are looking to enter into credit arrangements with. The common sense decision processes you might go through when considering whether or not to extend credit are also very similar when you are contemplating acquiring a business.
As with any new financial venture, the process must start with due diligence.
Secure a copy of the business’s last few years accounts. These will allow you to compare the situation the company was in financially a few years ago with where they are now. Obtain an up to date credit report to ascertain the current credit worthiness of the business. Search the internet for any adverse publicity about the business. Has it been paying its accounts on time or are there any other public areas of distress? (Remember how much in the news Carillion was before its ultimate decline). There may be a good order book but if the company isn’t paying its suppliers on time, could any suppliers have put the business on stop?
2 –Diligence on the people
The internet provides a multitude of channels to allow searches on directors of a company. Companies House is a good start as this will list the other companies a director is, or has been involved with. This will give you an indication of what you may be dealing with, particularly if there is a questionable history of involvement with insolvent organisations. Use your BPMA contacts and speak to their fellow peers in either the supply or distribution fields. The chances are that fellow suppliers or distributors will know of the director and they should be able to give you a measured critique of both the person and the business. Ask either the managing agent, or indeed the director themselves why they are selling the business? Should the answer be that they are struggling to make it work, is this because of the skills of the director, or the products being sold?
3 – What about the product?
Are the products being supplied by the business specialised or general? If the products are specialised, review the customers. Are they one-off purchasers or repeat buyers? Can the same items easily be sourced from a competitor, and if so could the business match any competitor on both a price and volume basis? If the products are general, again use the contacts in the supplier or distribution arena and utilise their knowledge. What are their views on the market? Is it sustainable? What does the future hold for the business and its place in the market? How strong is the customer base?
Conclusion In summary because we are the experts in risk management, we can see that there is more to buying a business than just the financials. Any good business decision is based around the control of exposure and risk but always start with the financial implications of any transaction and work your way from there in order to establish the value of the offering. What extra can you bring that enhances matters? Feel free to speak to us about reducing the exposure and risk that may be attached to any element of your business. We’ve not got all the answers, but equally we’re always happy to help any BPMA member in any way we can.