ANALYSIS OF THE COMPANY BEFORE SALE

Mergers and acquisitions usually run with a process called “Due diligence” (complete clearance) by the investor. Before this demanding process, which I describe in the article “Due diligence – tool for successful acquisition”, the investor needs to know basic information about the company, through which he can create an indicative offer – price and the conditions under which he is willing to buy the company.

But I will not anticipate and describe the acquisition process from the beginning. The investor is often a “seasoned” or experienced person in the world of business and focuses on key indicators of a company to get a comprehensive picture of the enterprise, potential and risks of an acquisition. The first meeting is primarily about obtaining basic information regarding the company:

 


 

Reasons to sell a company

The first question from the investor is, why the owner wants to sell the company and what percentage share of the company is up for sale? Reasons may be numerous. The owner is no longer is his/her prime years, no one to pass the company, still wants the company to move in the right direction and for someone to continue his/her good work. Furthermore health and fatigue of the owner. Today younger owners often sell the company. They have already achieved their intended objective and have new business ventures.

 


 

When to realise an acquisition

Over what time span should an acquisition be realised. Months or years? I know from experience that it is not ideal to hurry an acquisition. If the owner wants to sell the company quickly, it can cause the investor to think that the company is not alright. Secondly, in an effort to speed up the sale process, the owner loses potential investors, who will not appear immediately. It is better to wait for multiple offers and choose the best route. This is not about selling buns at the bakery. Read also the article “When to sell a company.”

 


 

What kind of investor is an owner looking for?

If a company has been growing for many years, what direction should it take in the future? Bank sector investors who buy companies, for sums of money, are not the ideal partner for the further development of a company. On the other hand, there are strategic investors who are able to integrate the newly purchased company into their existing  production strategies and synergies through more efficient production processes and position themselves better in the marketplace.

 


 

Subject of business

In business  information about the company has an irreplaceable role [can also use- information about a specific company can be absolutely indispensable]. And this is also applicable when its previous owner wants to sell it. Buyer is interested in everything – from the list of customers through to the financial statements and suppliers. The owner of the company should be careful with providing confidental information to the buyers.

 


 

Customers

This is a very sensitive issue and being vigilant and not too hasty to reveal the information only to an earnest investor is always advisable. Investors will be interested in the customers with the largest share of the company’s turnover.

 


 

Suppliers

The price that the customer is willing to pay of course has its limit. The wages of workers can´t be changed too much. So how to increase the company’s profitability? Suppliers – there can be significant savings and thereby increase profits. Big investors are well aware of the benefits of this and ‘bulk buying’ and centralizing the purchase of materials and equipment They are able to do so at much lower prices than a small company can achieve alone. This also applies for banking services, purchasing of software and other necessary services for the business.

 


 

Sum of future orders

An Investor  buys a functional company and they are very interested in a backlog of orders. It ensures sales and profits when the acquisition will take place [can also use – it ensures a quick turnaround following their investment] It’s an indicator of inertia, which could spontaneously work before a renewal management.

 


 

Economic analysis of a company – basic indicators

Documents are freely available to the public for information about the economic situation of a company. Investors, however, almost always require more detailed information that is more current and up-to-date or from the last period. Which is understandable, because the situation in the company during the quarter may change radically. Which is crucial for the investor.

 

 

  • Turnover

 

Total turnover of the company with the collapse of individual products and service

 

 

  • Profit + Depreciation

 

This is crucial information. The sum of operating profit and depreciation is called “Ebitda.” Using this information, the investor can “provisionally” calculate the return on investment. Eg .: If the company has an EBITDA of CZK 10 mil., The investor will offer 50 mil. for the purchase of the company.So in five years the investment should return to him.

The multiple of EBITDA differs according to the investor and the company’s field of business. In what fields are investors willing to pay the most, you can learn in the article “Ebitda – an indicator for investors.”

 

 

  • The ratio of foreign capital

 

How much of the company is foreign capital and equity? Investor certainly will want to know even the disintegration of bank loans and interest expenses maturities. Furthermore, what other loans are being considered – investment, operation, etc.

 

 

  • Profit and loss account, balance sheet

 

On the public domain, there is only simplified information, usually a year or so old. You need to have prepared the most recent information about the company’s performance.

 

 

  • List of major assets

 

What property the company owns or rents,  what the annual rent is and who is the landlord.

What machines are in the company, equipment and materials for production.

 

 

  • List of grants received

 

Supplemented with information on their use and when it is necessary to fulfill the terms of the grant. Substantial grants are available, but as yet unallocated.

 


 

Staff and departments within the company

when selling a company, the staff are very important for any investor. Once the acquisition begins, staff should know about it in order to avoid unfounded rumors and misinformation.

 

The Sale of a company is not a matter of a few weeks, it could easily take a year. And given fact that people tend to exaggerate and seek sensation around every corner, this may be a long time to become a breeding ground for the emergence of the most fantastic speculations and theories. It is always better to tell employees that the company will be sold and to introduce them to the real consequences of this fact before negotiations with prospective investors to keep them up-to-date with any movements.

 

The first impression, when visiting a company, can tell at what level the company is and also to reveal its structure. During negotiations of the acquisition to obtain information about top management to individual departments with key staff is also important. The average age of employees in the company to an investor plays a significant role.

 

  • Owner

 

An Owner manages their business or is able to delegate this position to a capable deputy and he deals only with strategic development? A Factor that can affect the speed of implementation of the sale of a company. This is related to the willingness of a business owner to handover responsibility from himself to the investor for an agreed period. Generally, the investor agrees with the owner over what period he still remains in company and help in forwarding company, not like the owner, but an employee or an external consultant.

 

  • Senior management

 

Financial director, commercial director, production manager, etc. These are valuable aspects of interest to the investor. Certainly he will want information on the amount of wages, length of service, experience and strengths of these employees.

 

 

  • Middle management and other staff

 

The exact number of employees in the various departments, age, salary, benefits and loyalty to the company.

 

 

  • Recruitment

 

If the company is successful in recruiting and low staff turnover will affect the outcome of the entire decision-making process and the investor can relatively increase the value of the company.

 


Information systems and software

What is important: the information system and other software that the company uses. Because these items can cost even millions of crowns, investors will certainly be interested in the cost of software licenses and their quality.


Marketing

Nowadays, it is almost essential to a company to work on their PR and penetrate the market effectively. So ho does the company incorporate its marketing strategy. Does the company have its own “in house” or chooses to work with external collaboration.


Know-how

Does the company separate itself from competitors and stand out in the marketplace? Does it have its own research department or any patents?


Possibility of expansion

Space for manufacturing and production is a common condition for investor interests. Possibility of extension, expansion of production areas and halls, it is important for the future development of the company.


After hearing this input, the investor has the majority of documents for submission of indicative bids and the process described in the article due diligence.