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Don't Overpay When Buying a Business

06.15.2015

As Seen in BizTalk in the St. Louis Business JournalIf you are in the market to buy an existing business, examine the company carefully to ensure that its price reflects its true value. After you get a company in your sights, investigating it thoroughly can pay off in multiple ways. For starters, your due diligence can help you negotiate on the price. Recently, Brown Smith Wallace carefully reviewed a company that a client was eyeing. The investigation found issues that led the seller to accept more than $5 million less than the original purchase agreement of $50 million.

This advance work also can help protect you from expensive predicaments that only arise after the company is your responsibility. If you are looking to buy a company, you will be better positioned if you follow some sound strategic fundamentals.

Evaluate the company’s earnings

Clearly, you will want to know how much income the company is pulling in. But you also need to find out how it’s coming up with its numbers by performing a quality of earnings review.

Is the business maintaining strong sales while keeping its costs down? That’s a mark in its favor. On the other hand, is its outstanding performance due to forces outside its control that might dramatically change after you buy the company? Could some of its achievement come from accounting choices that don’t stand up to closer scrutiny? The answer you find will help you determine whether this business is a good acquisition — or if its glow is powered by a source that could fade.

Investigate what you will be getting

What assets will be in place to maintain the success of the business? Pay attention to:

  • The management and workers. Does the current owner make all of the important decisions, leaving you to step into a vacuum when you take over? Or will you be inheriting a management team that’s trained and able to help you carry the load? People are usually the most important assets of any company, and measures should be taken to address how to retain the key employees.
    Also, consider checking out the background of the employees who may soon be working for you, just as you would likely screen new hires. Learning later that you have an upper-level manager with a checkered history is a surprise best avoided.
  • Fixed assets. The company may not have an accurate, up-to-date list of its fixed assets. Be sure that the resources you think you’re getting actually exist and are in good working order. That includes the business’ IT system. Is the company using hardware and software that the original equipment manufacturer still supports? If not, the outdated components could lead to sizeable costs — as well as headaches — in the future.
  • Customer and vendor agreements. Does the company have formal agreements with these parties? A lot of your future success with this business could be riding on the durability of these relationships, so be sure you know how strong they are.
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This is not an all-inclusive list of factors you will need to know about the business you are considering buying. Understanding the accounting implications of the deal is important, though these catch many people by surprise.

To learn more about value drivers to consider when purchasing a company, click here to view a quick video or request an infographic.

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To further discuss buy transactions, schedule a meeting with Bryan Graiff, Partner in Charge, Transaction Advisory and Litigation Support.

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