Potential for the Business Going Forward

General Category on August 15th, 2013 Comments Off

When you are looking at buying a business, financials only tell 50% of the business story.  It is important you are giving attention to all the other factors that will influence you buying decision.

Financials are straight forward, but like any game of sport, you are only as good as your last game.  Therefore buyers want to see how the business is currently trading and use financials from the past to gauge where you are now when compared to prior years.  If the profitability of the business has been increasing then little explanation is required, but if turnover and profit are down, as a buyer you will want to understand why they are down.

However it is important to give just as much attention to the other areas of the business.  Some of the areas you need to consider further are:

  • Strength of the lease, the landlord you will be dealing with and likelihood of receiving a new lease once the current one expires.
  • Growth areas for the business and more importantly the likelihood of growth going forward.
  • Expenditure required in the next 2 to 3 years – is a minor or major fit out required? the condition of the machinery used in the business, what needs to be spent on the business to take it to the next level?
  • Owner’s role and staff roles in the business.  If you take over the business can the owner be replaced an impact on the business once these changes occur.
  • Market going forward – are there new laws to be introduced, developments in the area, technology changes, location of the business with its customers?
  • Why is the owner selling – are the owners tired, not suitable for the business, can see changes that will impact the business, ready for retirement, change in lifestyle?

Let’s use the example of a 5 day cafe.  You obtain the past three financial years and the profitability is not great for the business hence the reason for sale.  You present the financials to your accountant and advice will be easy on this one – do not buy if you plan to run the cafe in the same manner.  So financials in the case help you understand what not to do but give you some of the likely running costs.  This is when you need to concentrate harder to understand why the cafe has not been profitable and how you can put in a formula for how you can run the business going forward.

In summary if you are buying a business what the business did 10 years ago helps you to understand the business you are buying now – but where will the business be again in 10 years time?  What is the potential for the business going forward after you acquire it?  This is what you also need to consider when you acquire a business.

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