Friday, June 06, 2008

Let the Buyer Beware – warning signs to look out for when buying a business

Here are a few examples of what to look out for and how to assess the true profitability of a business from Nick Pritchard, at Transaxman ltd.
Don’t forget that the seller knows a lot more about the business than the buyer.

There are several ways in which a business in difficulties can be identified. For example reduced recruitment and training activity, delay of planned maintenance, missing a major trade show, closure of product or quality development teams and reduced investment in tooling or software. When companies are prepared for sale, if the business is in some difficulty, they may simply cease any forward expenditure or investment. Ongoing investment in a business is crucial in order to ensure growing profits. This is often the reason that the best businesses to buy are the ones that are not actually being marketed for sale.

How to arrive at the adjusted net profit
The two main types of adjustments that need to be made are, allowances for non-recurring items, such as a grant or a big debt and items shown as costs that are really a distribution to the current owners.

Standardising earnings
Restating results shows what the earnings of the business would have been on a standardised basis, as an indication to the future earnings. The valuation exercise is undertaken to establish how much a theoretical buyer would be willing to pay as a capital sum in exchange for the right to receive those future earnings.

More information on Let the Buyer Beware

Thursday, June 05, 2008

Be aware of TUPE regulations when buying a business

In the Transfer of Undertakings (Protection of Employment) Regulations 2006, or TUPE, business buyers should know that they are not only taking on the employees, but also responsibility to honour all existing employment contracts and conditions of employment. This also includes disputes, tribunal claims and collective employment agreements.

The TUPE regulations apply whenever there is deemed to be a ‘relevant transfer’ of an undertaking. This applies to mergers, sale of a business by way of assets sale, going concern, or a change in franchisee among others. It does not apply to business transfers by way of share take-over.

More information on TUPE

Three methods of business valuation

1] Asset Valuation
This is an accounting-based approach that subtracts business liabilities from business assets to reveal the business value.
The complexity of this approach lies in deciding on what assets and liabilities to include and at what value to place them? Any asset that is not included on the balance sheet will not be accounted for in the valuation. The profits made by a company are not taken into account with this approach.

2] Discounted Cash Flow
The Discounted Cash Flow (DCF) approach is a technical valuation technique used with moderate to high cash generating companies. It works by looking at today’s value (at a given rate of return) of the accumulated profits of the business over a number of years added to the value of the business in today’s terms if it were sold at the end of this period. This approach is not easy to apply, in order to forecast the future cash flow of the business a full financial model needs to be prepared.

3] Comparables Valuation
This method attempts to extrapolate or interpolate the value of the business by using information collected on similar business sales in similar markets. This approach is the closest simulation of a true market-led valuation.

These are the most common valuation approaches used in the market. However there are many more, you need only go to half a dozen business brokers or valuers and ask them to determine the value of the company and to explain to you how they get to the figure.

More information on business valuation

Due Diligence guidence points

Here are some guidance points for running a due diligence process on a business you are planning to purchase.

Plan the process – Create a plan/timeline identifying who will be doing what. Stick to areas that are most likely to have any effect on the final sale agreement.

Employee issues – make sure that the due diligence process picks up any issues relating to the seller’s employees. Are any past or present employees litigating against the business?

Identifying issues - spot any issues as early on as you can so that the appropriate warranties and indemnities can be quickly put in place. Focus on larger issues first.

Work closely with the solicitor – lack of communication between the buyer and solicitor could result in the process failing.
Discuss key issues of concern with the solicitors.

Company culture is important too! – Ask your management to look into the target’s company. Compare the management styles and core values of your business and the target business

Collect information, before analysing - These are two separate activities within the due diligence process.

Don’t allow time to be an issue - be focused and don’t take shortcuts in order to reduce costs, you could end up spending more time and money over it in the long run otherwise.

More information on Due diligence tips