Buying a going concern is an interesting and perhaps even attractive way to get started in the business world. A going concern can be sold for many reasons. As I say in the conferences: " the businessman to be successful must develop indigenous malice, to obtain the results he wants ".
This was written to me several days ago by one of our subscribers:
“Hi Enrique, I have reviewed your comments and your course. I have a business idea, which I am considering instead of starting the business from scratch, to buy a company that is already active and they are selling it, but I need you to tell me what documents should be requested to see if the company is generating income or producing losses, how the true value of this company can be established in some way, what factors must be considered to measure the success that this company that is for sale can have. I hope to receive your comments soon. »
This is what I replied:
There are many attractions to buying a going concern; But it also has many implicit risks. The first question that arises is: Why is it selling? The seller's responses are not always true.
For this reason, the entrepreneur who wants to consider this possibility must take very firm steps to determine if it really is a “great opportunity”. What guarantees that if the previous owner was not successful I will?
There are many aspects to consider:
1. The history of successes and failures that the company has had
2. The story behind the product.
3. Try to understand the "real" reasons why the entrepreneur sells the company. They are not always what he manifests.
4. Its position with respect to competition, competitiveness, exclusivity and validity of the need that satisfies the product.
5. The opinion of customers and the community regarding the company.
6. Define if it is convenient to buy the legal figure or just the going concern.
7. The behavior of sales, contribution margins and net profits of the company, at least in the last 3 years.
8. Know the behavior of cash flow in these 3 years.
9. Determine the book value and the real value of all the assets and liabilities of the company, to know the assets of the company, which is almost never the real value of the company.
10. Project the company's Cash Flows, in three scenarios, at least for the next 60 months.
11. Determine if current owners will continue to have a stake in the business after it is purchased.
12. Review with lawyers the legal issues of the company, contingent debts and the level of tax exposure.
Of course, the Financial Statements can be very useful to better understand the company; But remember that they cannot always be trusted, even when they are certified or audited by a Certified Public Accountant. You should have assurance from the current owner that you are receiving "Management" Financial Statements. Of course, a skilled financier or consultant will determine with relative ease whether the financial statements and other information are consistent. Of course, it is specialized work.
In the end, the best tool is to prepare, as I mentioned in the list, a Cash Flow in three scenarios to determine the profit potential of a company that is casually defined by net cash flows.
Very few companies are valued for the purpose of buying or selling based on the Financial Statements or based on the value of their fixed assets. What matters for a company is "when the investment is recovered" and this is really what determines the value of the company.
Of course, it also has an impact on the definition of the type of buyer that is making the decision. A pure investor does not use the same criteria of desired profitability as that used by an entrepreneur who wants to operate that company himself as an entrepreneur and as an entrepreneur.
These are just some of the considerations that you should take into account.
It is just a checklist, the process has a protocol that must be rigorous to make a good choice.
Good luck and I hope this opportunity is really interesting.
