Eleven Things to Investigate When Buying a Business
Written by Sandip Rauniyar & Ashutosh Poddar Dt. June 1st, 2022
In the accounting world, a basic assumption that is used while preparing financial statements is that the business will continue as a going concern till perpetuity. And whenever there is any major risk to it, it is to be stated in the independent auditor’s report. When a company agrees to buy another one, it can also be to dissolve it permanently to reduce competition. For example – Some of the world’s biggest companies like Alphabet and Meta have done this to ensure they remain at the top. Luckily Competition Act in India prohibits such acquisitions.
A company with enough capital and time shortage normally buys an existing one instead of starting a new one from scratch. Or it can be bought to improve company’s existing business. Therefore, one need to make sure it has analysed some of the most important aspects which have been mentioned below for the acquirer to check:
1.Industry and Market Analysis
Understanding the industry’s methods and procedures of operations, its customs and practices among other things will play an important role for the acquirer to get a bird eye view of the company and its competitors. And thereafter to get an instant glimpse for evaluating company’s worthiness, its market share and customer database can be used. It will help it in setting a reasonable profitability expectation and achieve it too.
2.Business Operations and Supply Chain
After industry analysis, if it can be concluded that the expected revenue meets acquirer’s supposition then company’s operations and supply chain should be checked. While observing the business operations, important factors like firm’s scale of operations, normal business loss levels, and major heads of expense and possible causes of revenue leakage should be checked. It will provide the user with a very comprehensive image of the firm.
3.Present Conditions of Assets and Inventories
Out of total useful life of assets, their present operational condition should be checked. It will help in ensuring that company is ready to transfer its operations in a working state. It will also ensure company’s assets are efficient to generate optimal output or whether they require any technological upgradation understanding the current age of PPE.
Current state of inventories needs to be checked to see whether they can be used in their present state or do they require any further processing to achieve a processable position.
Type of industry greatly affects the locations at which the company carries on its business. For example, an FMCG company will prefer to be present at a location where it can find itself nearest to the residencies. But a high end restaurant will always prefer to remain in a premium location where it can attract the cream class of customers.
So it would be prudent to check the current locations of the business establishment being served and do these locations perfectly relate with company’s operations.
5.Market Competition Levels and Type of Customer Base
A company in a perfectly competitive market proving goods/services to end customers normally works with a low profit margin since there exist a large number of competitors providing same/similar kind of goods/services. But a company in capital intensive industry catering businesses instead of end consumers has only a few competitors and enjoy greater profit margins.
Therefore it would be helpful for the company if it can identify the level of competition and the type of customers it will cater.
6.Present Market Brand Image of the Acquiree Company
In present market, companies spend millions to reachpotential customers and educate them about the company’s existence and offerings. The spending increases with time to ensure people not only know about the company’s presence but they even try and accept it.
A case where company is already known and widely accepted by customers helps in saving significant promotional expenses. It will also provide a ready to serve market which can even be used for cross selling. With a positive brand image, even resellers proudly describe their association with the company by various means i.e. Website, Packages, etc.
Performance Evaluation helps in evaluating the company’s overall performance and finding the key areas that need improvement. It can provide the acquiree with insights of the company’s various internal production procedures. It can even help in rating the severity of changes that will be demanded. It can then be evaluated whether investing in those areas, with present industry and market, will be fruitful or not.
8.Financial Analysis and Compliance Checking
Evaluating company’s financial position and various important financial statements will help in finding irregularities that can be checked and managed i.e. Liquidity, Solvency, Capital Structure, etc. Financial Ratios will also help in determining company’s financial health of the business.
Along with this, it shall also be checked whether company has been regular in complying with its statutory duties. If it can be observed that there have been irregularities at various points of time then the same need to be reasoned from management.
9.If Buying with the Purpose of Merging it in own Business, Check Compatibility
If one of the main reasons of acquisitionis to mergethe acquiring company with acquirer’s own business then this decisions should be taken after considering nature of both businesses, success probability of the merger, customer database unification feasibility and Synergy Benefit inflow viability to the company.
Each of these above mentioned elements will help in getting a more accurate solution to the question “Should the company be acquired?”
10.Future Prospects Based on Market Surveys and Demand Estimation
After evaluating the company based on its present & past data and parameters, future aspects should also be taken into account. Here future aspects like industry expected growth rate and company’s share in it, customer’s spending expectation, ongoing researches and their tenability and Demand analysis can be prepared.
11.Government Actions, Initiatives and Interventions
State Governments and Central Government often promote or demote a certain category of product/ service offered by companies. For example – Negative advertising and excessive price charging of tobacco products, Prompting Make in India initiative, etc. So the kind of company’s offering shall be examined and categorised if it belongs to the government’s positive or negative list. From time to time, governments incentivise companies to produce goods that they find important for public. And they even intervene in free market flow if they feel the intervention is in favour of general public. Hence it shall be observed that the product/service offered does not belong to the negative list.
This is only a comprehensive checklist and can vary depending on various circumstances. Hence, the reader should use only the relevant information as per their need.
Sandip Rauniyar & Ashutosh Poddar