ASSESSING BUSINESSES FOR SALE
To allow you to make a meaningful assessment of any business you will need the following information:-
- Copies of the full accounts for at least the last 3 years trading
- Copies of all relevant lease(s) if premises are leased from a 3rd party, rather than owned by the seller
- A list of the assets included in the sale [e.g. plant, machinery and equipment necessary for the business to function] If the business is being marketed by a professional business transfer agent, this information will normally be included in the sale brochure.
- If available, VAT returns four the last 4 trading quarters (for businesses with annual sales of over £62k)
It is common practice for the seller or a party representing the seller to insist that you sign a confidentiality agreement or non-disclosure agreement (NDA) before releasing any of the above information. If in doubt about the agreement you are being asked to sign it is recommended that you seek legal advice
Viewings
Naturally you will want to view the premises of the business you are planning on purchasing. However, in many cases the seller may not be prepared to show you around during trading hours for reasons of confidentiality. Many sales are conducted without the knowledge of the employed staff as there is a tendency for employees to feel insecure if they know there MD is about to sell up which in extreme cases may result in them seeking employment elsewhere. Viewings are therefore often conducted outside of trading hours – e.g. weekends or evenings. It is important for a purchaser to respect a sellers wish to keep the sale quiet from their staff. A good way to get a good feel for a business without compromising the vendor is to ‘mystery shop’ the business – i.e. to use the services of the business as though you are a customer – this can provide an indispensible insight into how the business is currently performing, what staff are like and where there is room for improvement etc.
Taking a closer look - financial due diligence
What is due diligence?
When buying or renting a commercial property, all purchasers will commission a professional survey before proceeding with the deal. Why? Because underneath the façade of new plaster and fresh paintwork may lurk structural or other problems such as damp, or subsidence which may not show up to the untrained eye, but which may seriously devalue the property.
Financial due diligence is rather like a structural survey. Doing it properly involves commissioning a specialist trained in uncovering the tricks of the trade that some sellers may use to make their optical business look attractive, but which may mask a less favourable financial picture and therefore a less valuable business.
Do I need to undertake financial due diligence?
All buyers should carry out a level of financial due diligence.
In ideal situations where the financial records provided are up to date and transparent and the vendor is cooperative in providing VAT returns, bank statements and PDQ/Credit card statements which can be satisfactorily cross referenced with the accounts, then it may be acceptable to carry out the process yourself, or with the assistance of a non-specialised accountant.
However, if sufficient information proves difficult to obtain, or if there is uncertainty or a lack of clarity on any aspect of the business books, then it is recommended that you seek appropriate professional advice.
Typical scenarios where financial due diligence is required include:-
- Situations where the vendor owns multiple branches and is only selling off part of their practice portfolio, but where the accounts are amalgamated so that it is difficult from the information provided to accurately ascertain or confirm the true turnover of the individual practice(s) you are buying.
- Over cautious sellers with nothing sinister to hide, but who don’t want to disclose personal financial information. The involvement and approach of a 3rd party professional to carry out the exercise may reassure the vendor and allow you to confirm that all is well and to proceed with the purchase with confidence and peace of mind.
- Situations where the figures are inconsistent or outside of normal parameters, or where profitability or sales have dramatically increased in a relatively short period of time. Closer inspection of these situations may reveal a remarkable practice, a genuine accounting mistake or a cynical attempt to present the practice in a better light than the reality.
Peace of mind and insurance
Returning to the metaphor of the survey, another key bonus for a buyer commissioning a structural survey is that they are effectively insuring themselves. If the surveyor misses something significant then the buyer may go back and sue the surveyor to recoup any ‘losses’ incurred (subject to certain disclaimers.) Exactly the same principle applies to a financial survey / financial due diligence.
When should I commission a professional due diligence?
To avoid wasted expenditure we would recommend that you commission a professional due diligence service only once you obtain acceptance of an offer by the vendor and have a written offer of funding from a lender.
For the same reason we would recommend that once you are in a position to do so, you should carry out the exercise as soon as possible, to avoid possible significant wasted legal costs should the due diligence exercise find something adverse causing you to pull out of the deal.
