Buying a business can be an exciting route to growth, but it is also a financial decision that deserves careful scrutiny before you commit. The headline price is only one part of the picture. Before you commit, you need to understand what you are buying, what could affect future profit and where the risks may sit.
Buying a business: look beyond the sales figures
Start by reviewing the quality of revenue. Is income recurring, seasonal or dependent on a small number of customers? Look at profit margins, the cost base, outstanding debts and any contracts that are central to the business. A healthy turnover figure does not always mean the business has reliable cash flow.
Key financial checks before you commit
- Review recent accounts and management information.
- Understand tax liabilities and filing history.
- Check debtors, creditors and outstanding finance.
- Identify contracts, leases and commitments that transfer with the business.
- Consider the working capital needed after completion.
It is also important to understand why the owner is selling and what assumptions sit behind the forecast. A careful review can protect you from paying for value that is not really there.
Use the right advice early
Due diligence is most useful before you become emotionally committed to the deal. It gives you the information to negotiate with confidence, ask better questions or walk away when the figures do not support the opportunity. Our article on finding the right accounting support explains why having the right adviser matters, and management accounts can reveal the information a buyer should understand.
Make your next move with confidence
AA&R provides due diligence services and business strategy consulting for owners planning their next step.
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