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Financial due diligence on a business for sale

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Buying a business might seem a rare event these days, but it is more important than ever to 'look before you leap'.

There are a many areas to address, and it is very dangerous to take management or vendors at face value, especially if they have something significant to gain as a result of your acquisition.

This doesn't relate to only the sales proceeds, it might relate to the vendor's job security, wanting a stake of their own or even wanting a kick-back from the outgoing owner for assisting with the sale.   

Alongside commercial and legal reviews, basic financial due diligence can not only can help avoid red faces post-acquisition,  but in the worst cases, help avoid lengthy legal action to seek redress for those skeletons in the closet that you didn't look for or were not pointed out to you.

In these tough economic times, businesses can be tempted to boost their balance sheet value to avoid awkward questions from funders or key stakeholders as well as saving face with suppliers and credit insurers.  The balance sheet is a good place to begin your review.

The balance sheet is a good place at which to begin your review

Even simple questioning can reveal gaps or problems which were not evident from initial discussions and value assessment. 

Beware items such as goodwill and other debtors if they aren't sufficiently well-defined, and look for the potential for understated liabilities. It can be remarkably easy to start with a net asset position and end with net liabilities once the surface of less robust businesses or industries has been scratched.

When taking on the profit and loss account, it is important to get behind the numbers but with an eye on the commercial aspects of the business. You should also ask yourself questions like: 'Have unrealistic contracts with customers been entered into that would be punitive if broken?' and 'Do the staff have salaries that are significantly above industry average?' 

It is vital that all key aspects of the business are reviewed and understood before purchase. Remember, 'Marry in haste, repent at leisure'.

Goldsmiths Corporate Finance can be contacted for help with buying and selling businesses on 01628 627 637


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