Justify the value of your business – Part 2

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 2

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:

LAST WEEK:  Some aspects of a ‘due diligence’: legal & tax, finance, operations & industry, competition, suppliers and more.

Business assets

  • Are fixed assets included in the sale price listed and what is their book value, market value and replacement value and which is the purchaser paying?
  • If business is a limited company, is the purchaser buying shares or the assets?
  • If purchaser is buying inventory or work-in-progress, what is the value and will it be adjusted at the time of settlement?
  • Is the purchaser buying intangibles and can they be transferred, e.g. contact database, business names, intellectual property, exclusive rights or leases?

Stock

  • Is stock turnover comparable to industry benchmark?
  • Does stock include slow-moving items from another business?
  • Has inventory been valued in cost-of-goods statements?
  • Has any inventory been sold and not shipped?

Equipment

  • Is it in good repair, efficient, in danger of becoming obsolete or difficult to service?
  • Are parts available and could it be sold easily?
  • Is equipment depreciated and is it reasonable and based on accounting or tax?
  • Is any equipment leased and what are the terms and cost of all leases?
  • Will purchaser get ownership when leases expire and what are residual values?

Expenses

  • Are all expenses known and will they be the same for a new owner?
  • Could some expenses have been paid via another business?
  • Have expenses been avoided or delayed, such as equipment maintenance, and could this be an issue later?
  • Are any annual expenses due soon and are there new ones to consider?
  • Are there maintenance contracts in place, what do they cover and are they paid up-to-date?
  • How does the business’s expenses compare to industry benchmarks?
  • Are any expenses prepaid and are they reimbursable?
  • Will a purchaser be responsible for corporate body expenses?
  • Would decreased or increased sales have an impact on costs?
  • Are costs allocated to individual products/services and would any change in product/service mix affect them?
  • Are there any ongoing regular expenses that a purchaser would need to honour?

Debts

  • Are the assets being sold free of debts or liens and, if not, what are the terms of repayment?
  • Are there any contingencies such as warranties, court actions or guaranteed debts or accounts? Is a purchaser assuming any risk of being liable for a previous owner’s actions?
  • Will the cashflow from operations be enough to pay costs and obligations?
  • Is interest paid for money loaned to the business?

Much of this information was gathered from a Queensland Government document and as you can see it’s a pretty long list. If you’re planning to sell your business anytime in the future it would pay to put a plan in place to address these issues to avoid having to discount your sale price in compensation.

Sue Hirst, Cofounder & Director, CFO On-Call

cfooncall.com.au

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