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    Deciding which company to buy

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    What factors should you consider before deciding which company to buy?

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    POSTING 10798


    It is very important to investigate all aspects of a business before committing to purchase it. The financial statements are only one small fragment of the areas that should be investigated. Below is a summary of some of the areas that should be considered:

    • Sales.
    o Is there a future for the product and/or service being offered? Is the business expanding, will it become obsolete in the short-term?
    o Have all sales been reliably recorded?
    o Is the monthly and annual sales pattern consistent or seasonal? Do sales fluctuate due to one-shot promotions?
    o Can sales increase with current resources?
    • Costs.
    o How will sales fluctuations affect costs?
    o Are expenses all-inclusive or have some expenses been delayed?
    o How soon are the expenses due?
    • Profits.
    o How will sales fluctuations affect profits - what is the minimum and maximum likely sales - how will inflation affect sales and costs?
    o What is the break-even point? Has future cash flow and profitability been projected based on past results.
    o Has the Profit and Loss Statements, the Tax Returns, the Purchase and Sales Records been analyzed? What about the bank statements?
    o What are the book value, market value, and replacement value of the fixed assets?
    o Exactly what is and what is not included in the offer to purchase in writing?
    • Liabilities.
    o Are the terms of the debts you are assuming in writing?
    o Are you assuming any risk of liability for the seller's actions?
    o Are there advances or pre-payments that should be turned over to you?
    o Will cash flow cover the debts?
    o How is the business credit rating with suppliers?

    Most buyers are interested in the performance of a business, not just its asset value. Therefore potential earnings should be a factor that is taken into account. Buying a business in an industry with a product that you know well or with a service that you feel comfortable providing should be a consideration as well.

    The first question you want to ask is "WHY?" is the owner selling the business. Take the answer to that question and investigate - look at everything, ask questions of everyone. This includes the owner, the competition, the local chamber of commerce, suppliers and customers.

    Of course company assets will have the most impact on the overall value of the business. Carefully examine the condition of the assets, as current market value may differ from the initial cost of items. Old receivables can become your bad debts and outdated equipment can be costly to replace. Review any accrued liability with caution. Make sure there are no ugly secrets.

    As pointed out above, besides tax returns and sales reports, you'll want to examine profit & loss statements, cash flow statements, inventory turnover, accounts receivables and operating budgets. The company's business practices and accounting methods should also be reviewed. Create your own profit projections using the current market condition and the financial information you receive from the business. For the most part an accountant will perform ratio analysis to determine the health of the business; however, you should at least learn the definition of the current, quick, days payable, days receivable, inventory turnover, return of assets, and return on investment ratios.

    • Current and quick ratios address the financial liquidity of the business. They reflect the ability to liquidate current assets to pay off current liabilities.
    • Days payable and days receivable also reflect liquidity. They tell how long the seller normally takes to pay off accounts payable, and how long it takes the seller to collect on accounts receivable.
    • Inventory turnover reflects the number of times the average inventory on hand is sold in a year. The higher the ratio, the more times the product is sold, and the more sales that is generated.
    • Return of assets and return on investments are performance ratios of investment. They demonstrate how well the seller is using business resources to generate profits. Return of assets shows how well company assets are used to generate profits.

    Cash flow analysis will help check on the financial health of the company. A projected cash flow statement estimate what the flow of money will be like in the coming months or years based on a history of sales and expenses. A monthly cash flow statement reveals the current state of affairs. The basic elements of cash flow are:

    • Starting cash - what you have on hand at the beginning of the month
    • Cash in - all cash received during the month, including sales, paid receivables, interest or cash from sales of assets or stock
    • Cash out - all fixed and variable expenses
    • Ending cash - Starting cash + cash in - cash out

    Franchising is an attractive option for those wanting to start their own business. Purchasing a well know franchise gives the back up of a well-known brand. However, franchising has both good and bad sides.
    1. There are a variety of businesses ranging from multi-million dollar operations to part-time business. There is something for everyone and for every budget.
    2. It is one of the safest ways of starting a new business. There is a high success rate provided a good franchise is chosen in the first place.
    3. A good franchise will offer you a proven business format with initial and continuing support. Franchisors often have field support staff to help franchisees.
    4. The business ...

    Solution Summary

    The expert examines which company to buy.