[Question] Things to check when purchasing an existing business

[AmithS]

Hi Everyone,

As i constantly think about things i need to check and verify when purchasing an existing business many things come to mind like,

Check that VAT returns match sales and license transfer\application costs, etc...

From your experience, what are the things to check on and those things that no one thinks of that could cause potential problems when taking over the business as they might not off been completely disclosed?

[Dave A]

I'd suggest get copies of:

• Audited financial statements
• At least three months bank statements
• At least 6 months VAT returns
• Employment contracts of key personnel
• Key client contracts
• Tax clearance certificate

When it comes to hiding stuff - that could be just about anything. Thus, if you're buying a business don't "take over" the existing trading entity. Buy the business from the trading entity and put it into your new one.

What you need to understand is where do the sales come from and why, what the margins are, what the cashflow effects are, what the return on investment is, and (the one they'll probably try to hide or minimise) where the risks are.

[AmithS]

Thanks for that valuable input Dave.

The part that really gets me is actually the profit margins.

Most people just spit out a percentage and claim it’s the average profit margin.

The last set of financials i went through, the owner gave me an average profit margin of 20 - 22% and his POS system and what i calculated from his budget was only 11%

[Yvonne]

Dave's advice is invaluable, but if you are considering buying a business, I would get the best professional advice I could: (can recommend Business broker: Mark Corke - Suitegum) it will cost you relatively little compared to what you stand to lose through an error in judgement.

Yvonne

[totius54]

Very few profitable companies is offered for sale. When looking if a company is profitable the Financial cost ( hp , interest payed , Repayment of loan accounts )plus salaries paid to directors. Will give you a good indication what your return can be.

Normally if you have the sales of past 3 years you can see if the company has potential.

If you have to raise capital to buy a company, I would stay away if the repayment exceed the current financial cost.

Any reputable company should be able to give you the following in %

Total salaries compared to sales , Engineering sector 30%
Cost of sales 35% max
Fixed cost 14% max
Financial 16% max
(95%)
I would insist on this