Each business has different environments, if you do many business acquisitions over time you quickly see that there are fundamental elements to the location, qualification and negotiation processes of buying a business, that once learned, can be leveraged repeatedly from one business purchase opportunity to another. This article will give you an Idea to incorporating most of the elements you must have to systematically qualify and “bias” the business purchase negotiations in your favor with the business seller. Let’s see the steps that are involved in Business Evaluation and Purchase or Sales Analysis.
- Company Analysis
- Business Valuation
- Business Purchase and Sale Analysis
- Communicate Findings and Analysis to Seller
Company Analysis Steps:
Review all the informations that are received from the seller as solicited in the buyer’s Letter of Intent. Adjust historical financial statements given by the seller to represent profits that reflect actual business performance and exhibit correct asset and liability values. Assess all non-financial elements of the company like, Customer sales mix, customer retention rates, customer locations, employee counts and performance metrics, landlord contracts and lease provisions, bank/financing relationships, key suppliers and critical product or service content and warranty issues etc…Prepare a “zero-based” budget for the next 3 financial terms, including anticipated monthly cash flows for the business including acquisition debt service requirements
Business Valuation Steps:
Estimate the profit based approach to business value determination, this will requires the use of capitalization and a wide variety of Discount rate elements based on, Projected real returns with inflation assumptions Industry growth factors and risk influences Management additions or deletions and compensation changes A wide variety of non-financial factors and assumptions. Consider each of the business valuation methods for relevancy based on historical business performance, future performance assumptions, various non-financial aspects of the business, the anticipated final terms of business purchase, the financial and human resources that will be available to take the company where you want it to go
Business Purchase and Sale Analysis:
Select specific assets and liabilities to be purchased. Identify a price allocation to each asset and liability you select. Examine various means to purchase current debt obligations, consider seller contingencies. Rank each of them to purchase current debt obligations and pick out the best for your constraints. Put together a monthly and yearly post sale cash flow analysis for both the business buyer and the seller. Emphasize positive cash flows for ultimate seller presentation. Test your proforma financials for possible seller “numerical exaggerations” or mistakes.
Communicate Findings and Analysis to Seller:
Your primary objective should be, justify your desired company purchase terms in a professional manner, to maximize your credibility and foster constructive dialog with the seller. All findings and analysis must be proof read before presented to the seller. All documentation should be organized in a professional Format. The information should be introduced as a “starting point”, a basis of further discussion. Your data should include numeric analysis responses to awaited seller Positions. Consideration should be made to have a professional, “non-buyer” present the findings. All documentation must be also used for future lender, key supplier, landlord and employee presentations. Each presentation customized or beefed up for the targeted audience.
Purchasing a viable business is a complex and emotional experience for both the business buyer and the seller. The business seller often has much of their life and money wrapped up in the enterprise and is looking for the long awaited “pay day”, while the buyer typically has an intense “opportunistic” disposition fueled by a “seek and conquer” methodology. The business analysis and valuation steps are the key components in business buying process to reaching the ultimate objective of your business.
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