Justify the value of your business

To achieve maximum value for your business, look at it from a potential purchaser’s perspective.

Justify the value of your business with a ‘due diligence’ – Part 1

If you want to achieve maximum value for your business, it pays to assess it from a potential purchaser’s perspective. This is because a seller’s perspective often includes emotion, which has no value to a purchaser.

A savvy purchaser will perform a ‘due diligence’ as part of the process. Here are some aspects of this:

Legal & tax

  • What contracts are in place and are they current?
  • Are tax liabilities up-to-date?
  • Are there legal notices served on the business?
  • What are the tax implications on the sale/purchase, e.g. CGT, GST etc?
  • Has the sale agreement been properly drafted and is everything included, e.g. assets, escape clauses, ‘sale as a going concern’ etc?
  • How has the business been valued?

Finance

  • Analysis of financial records and a review of quality, accuracy and results.
  • Accounts receivable – are they included?
  • Sales analysis – reliability, bad debts, sales patterns, customer spread.
  • Sales forecasts – obsolescence, mix, growth potential, minimum/maximum likely, salespeople reliance, current owner trade restriction.
  • Effect on profit of increased/decreased sales, inflation.
  • Warranties/refunds potential liability.

Operations & industry

  • Is the business suited to the potential purchaser?
  • Is it part of a franchise and does it have rights to carry on business in its current location?
  • Is it ‘work health and safety’ compliant and are there potential liabilities?
  • Is ‘best practice’ in place and are there manuals/guides available?

The seller

  • Reason for selling and are they cooperative with information?
  • Will they train purchaser and are they critical to the business success?

Competition

  • Is it in a competitive environment and are competitors gaining strength?
  • Is it affected by the internet and is the industry growing, declining or static?
  • Is deregulation a possibility?

Suppliers

  • Will they continue supply and are contracts in writing?
  • How is the business’s credit rating and will this transfer to the purchaser?

Location

  • Is it good and are there developments that could affect future business?
  • Could town planning or major road or public works have an effect?
  • Is a rezoning application necessary if the business is to move location?

Leases

  • Is there a premises lease in place and can new owners continue or do they need a new one?
  • Has it been checked by a lawyer?

Staff

  • Do they have proper job descriptions and engagement contracts?
  • Are remuneration packages clearly stated?
  • Are they paid correct awards and are increases imminent?
  • Will purchaser be liable for accrued entitlements, e.g. annual and long-service leave?
  • Is workers compensation up-to-date and paid for all staff?
  • Do staff members require any licences to perform duties?
  • Is it possible for purchaser to meet staff privately prior to the sale?
  • Is adequate salary allowed for owners’ input in addition to reasonable profit margin?

NEXT WEEK: More aspects of a ‘due diligence’: business assets, stock, equipment, expenses and debts.

 Sue Hirst, Cofounder & Director, CFO On-Call

cfooncall.com.au

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