The process of buying a company is similar to selling a company except that you are looking at things from on the other side. Assembling the same team of experts to ensure success: Broker, Attorney, technical/operational expert, and CFO. You want the broker to find candidates that not only fit quantitative parameters (revenue size, Ebitda, geographic location, etc.) but candidates that meet strategically in terms of what is the plan for the combined company.
If the Seller is staying with the company, there must be good working chemistry between the Buyer and the Seller and the Seller must make the mental transition from being in charge to being an employee. It’s important to properly prepare to buy a business.
Acquiring companies in the $5 to $20 million range, my first starting point during due diligence is to get a backup copy of their system. Even though they may be operating on different business accounting software, there are multiple reasons why this is a good idea:
Financial statements are only showing you the results; you want to dig deeper and get a further understanding of their business
Having access to their system will efficiently allow you to run these reports without having to go back and forth with the Seller. It also gives you time to assess the business benefits, financial discipline, and opportunities against your criteria.
Most small business’s book revenue and expenses on a cash basis. It is essential to make the necessary adjustments to bring those financials into an accrual basis. Specifically, payroll accruals, bonuses, commissions, and insurance. The benefit of adjusting the current cash books into accrual books is twofold, it correctly gives the Buyer a better picture of the financial situation of the company, and secondly, it will most likely result in a lower Ebitda which in turn will result in a lower purchase price.
One of the few benefits of evaluating a target on a cash basis is that you should be able to reconcile the sales to the cash receipts relatively easy or at least with a small range of error, giving you a certain amount of comfort that the revenues appear real. Similarly, you want to make sure that the major cash disbursements and expenses shown on the bank statement trace back to the P&L. Furthermore, you want to make sure that the Seller has disclosed all bank account related to the business. Be mindful of any intercompany transactions to verify they are not material or maintained on an arm/length basis.
Measuring trust in the system is just as important as measuring adjustments to Ebitda. I take the perspective that every potential deal starts with 100 points of trust, and I start deducting points from this stating point based on these areas of review:
