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.
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.
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