Business for Sale – Valuing Processes and Due Diligence Checklists
March 20, 2016 Business Terms
“Putting Your Business Up For Sale Can Be Complicated, This Check List Will Come In Handy!”
After Just recently going through the process of selling a business. I realized actually how much guessing is involved with putting your finger on exactly how much value or risk that’s in any particular business deal. It’s a good thing that I have been through many deals or I really would have been up creek with out a paddle. With that thought in mind I deiced to create business for sale check list to going over valuation and due diligence that will help both buyers and seller with this difficult process. I was lucky enough to have this in my head from years of experience. Trust me, It did not start out that way. I had to read countless book on the subject and it still comes down to trial and error. These are some key points that I have used to get fair value and limit risk in the past. This isn’t the end all on the subject but, It’s a good start and will grow into a great resource!
For any business for sale, there are only two parties concerned: the buyer and the seller. The seller might want to dispose of his company for reasons of his own. The buyer, on the other hand, is attracted and interested in the future possibilities of the business.
For their mutual benefits, this appraisal of the company’s worth is called the valuing process. This also includes conducting the due diligence checklists. For all intents and purposes, the valuation and the due diligence work for the benefit of both the two market contenders (the seller and the buyer).
During this delicate process which can involve huge sums of money, the seller will strive to present all the positive assets of the company in the best possible light. The buyer, in turn, will try to dig deeper and check on the raw evaluation of the company’s basic structure and all, including its future promises.
There are several methods of assessing the worth of a business enterprise from the perspective of accounting. Unfortunately, each of these does not cite the many factors that produce value to a company or business.
Some will check on the assets and liabilities aspect while some will inspect the company’s cash flow or its market components. The adjustments made on the Balance Sheet reflect the market value for real estate and equipments.
The market conditions are also looked into because they reflect value (growth and decline in sales, gross sales as reflected on customer percentage, margins of profits and other items as influenced by the market).
The actual valuing process of a business had already been freed from guesswork. There had been other factors (similarity in the type of products sold or what a company feels they need or had earned.) Rather, the valuing process had evolved into a formula that has its basis on many factors.
The factors are now grouped and classified accordingly. Some are classified as internal. These are those factors that are associated to the business that is currently being evaluated. Some are categorized as external and are linked to the market at large and the pervading economy.
Internal & external factors
These internal factors include the historical performance of the business in the community, its longevity in comparison with the others, its total earnings and profitability for a given time period till the present, its current financial strength, the type or structure of its ownership, the current cash flow, the given forecasts for the future, its current operational control, structure and conditions.
On the other hand, the external valuation include such factors as industry trends, economic factors, market position, rank in the industry, company performance compared to standard industry performance and government regulations.
For buyers, “due diligence” checklists are likewise considered just as important when analyzing a business for sale enterprise. For sellers, the checklists also help them pick out what information to give out.
The first things to look into the checklist are the P&L statements (profit & loss) and the balance sheets. Both show the financial performance of the company. Buyers of businesses are enjoined to review 7 years worth of P&L to know the financial pattern of a particular company.
Accounts payable and receivable
The other financial papers to check into are the ledgers for the accounts payables and accounts receivables. The buyer can request which the seller may agree for a more scrupulous analysis, where “due diligence” can have a review on such items as tax returns, bank records, invoices and tax filings on payrolls and sales.
Leases on the premises and on the equipments for buyers to know the responsibilities of the lessees are also reviewed.
Ownership of the business
Within the umbrella of “due diligence”, the seller is expected to be the title owner of the assets of the business to be sold, unless previously disclosed. This is done to exempt the buyer from surprises, pleasant or otherwise.
Considered an important and vital step in the purchase of a business, due diligence is done as systematically as can be. The assets list to be sold to the buyer must pass review. The buyer must also investigate the working conditions of the equipments, machinery and other company properties.
The buyer is also enjoined to check on nearby businesses to check on the number of competitive companies in the area. The discretion of the buyer is needed since there is no ruling on how many should the number of competition be, if ever, in the nearby vicinity.
At first glance, the valuation process and the due diligence checklists might look unforgiving and overly meticulous on business for sale. However, for the buyer and the seller, the findings and the results on the valuations and those in due diligence checklists are necessary for both of them. I’m going to be focusing on posting more articles over the up coming weeks to help everyday people go through the process of selling or busienss busienss. Make sure to see what else is selling in your area by checking our listings: Click Here
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