Suppose you own a stock of a certain company and hear that it is buying another company. As someone who has their money invested in it, it is natural for you to analyze whether the new venture will be beneficial for you or not. Alternatively, if you are buying a business yourself, you need to carefully analyze the potential risks and rewards linked to it. In short, you should study the new business’ assets, finances, and liabilities. To find out if the company is worth the price tag attached to it, you need to also find out how the acquisition will benefit your current business.
When analyzing a business for acquisition, here are a few things that you must consider to get the best out of the deal.
Your targeted business should be comfortable handing over their financial statements. In the case of a public company, they should have a history of financial statements with the Securities and Exchange Commission (SEC). Even if the company is private, you should ask for the financial statements of the past 5 years, at least. To understand and audit the financial statements, you can hire a professional.
With the financial statement, you can verify that the company is not going into a loss or find out if the owners are trying to get rid of it before going bankrupt. If this is the case, you should avoid pouring money into a lost cause. However, if you are looking to purchase a company that isn’t making as much as you want, look for investment capitals. You need to understand the difference between private equity and venture capital and then decide which method is best for capital generation.
After checking the finances of the company, you should look into their assets. Assets can be anything a company owns like its buildings, land, furniture, office equipment and workforce. You should also look into the clients working with the business, and request an aging report to determine if their clients pay on time. You will want to have an idea of how much money the company can generate in a month to calculate its profits.
Another thing to look for is the intellectual property of the company. This includes patents, trademarks, trade secrets, copyrights, and licenses.
Determine The Benefits It Will Provide To Your Existing Business(es)
You should have a solid idea of the new company you’re buying and their target audience so that the company can easily integrate with your organization.
Before buying a business, you should also consider their geographical location and do some research on their organizational culture. Ideally, your revenue should increase after you make an acquisition. Be careful not to get in business with anything shady to avoid dragging down the business(es) you already own.
A company’s liabilities are defined as its debts and obligations. Liabilities include loans, payables, mortgages, and expenses that arise due to its operations. Employee salary makes up the largest part of a company’s budget, so you should ask for information regarding the number of employees, their basic pay scale and payment history to determine how much money is spent on meeting their needs. Along with that, you need to make sure that the company has a healthy debt-to-equity ratio as a company with a high debt load is not very profitable to acquire.
By studying payables, you can determine how much money is spent on buying goods and services from other businesses, and you should find out whether the company is getting sued because court trails can cause a very deep dent in the budget.