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Evaluate a company

I would like to buy a running company in the mid of a financial year. how i evaluate the company? which statements i should review? from the review of their Balance Sheet, is it possible to know the price of the company? and what about the profitability of the company..


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By DMGbus
20th Dec 2011 13:49

Due diligence

The operative phrase here is "due diligence".

It means check, check, check, check all the presented data.

It further means (to me at least):

# Don't believe all that the seller tells you

# Look for what you've not been told (the "skeletons in the cupboard" such as: a falling out with suppliers or customers, verbal requests by customers for future or retrospective discounts; verbal advice to existing owners of future cost price rises;  - there's plenty of scope for deception by suppression of data here!)

# Each trade has its own nitty gritty of essential / relevant points to look at - look at the particular trade in general and `ascertain the market norm for margins and ascertain why the prospective business is presented in a (likely) "too good to be true" light.

# Don't underestimate the required knowledge and input required to operate the business in the future after you acquire it

The above just "scatches the surface" on the subject - there's a lot more to it as any experienced advisor will tell you (but presumably you wish to avoid the cost of advisors?).  If you DO you an advisor check that they have a knowledge of the trade concerned.




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20th Dec 2011 15:16

I always start with a credit check on the company and its directors, including any other company they are associated with plus everything detailed above. If you have any doubts employ someone to do the due diligence for you as it requires specialist knowledge

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By pawncob
20th Dec 2011 17:16

I suggest

You get your accountant to do it for you.


(Or you could study for five years and learn how to do it yourself)

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21st Dec 2011 09:42



You really need to look at everything or as close to everything as you can get. Businesses cost far too much money to be anything but absolutely thorough. 

So for starters:

Monthly profit and loss for the last two/three years. Look at the trends, look out for any unusual spikes (are these one-offs that flatter the historical performance). Compare the P&L to cash generation. Are they actually turning profits into cash?Are there forecasts? If there are how can you verify the reasonableness? Perhaps x% is contracted already, how successful has the company been at forecasting in the past?Look at the balance sheet. Identify all the liabilities that you are going to have to pay for in the future, these effectively add to the cost of the business and include things like year to date corporation tax.Look at the level of working capital in the business. Using the history try and work out what a 'normal' level of working capital is and ensure that this amount remains in the business. You don't want to be buying the company having found that the previous owner has raided all the working capital leaving you to stump up a load of cash to keep the business trading. If the business is seasonal too you need to be very careful you have the cash to get through any cash intensive parts of the year.Look for any related party transactions. There might be liabilities to the owners left on the balance sheet or even worse the profits might be supported by complicated (fabricated?) related party dealings.Look at what is not on the balance sheet. Will there be redundancies that you have to pay for? Costs of restoring offices to original condition? Ongoing litigation?Look at all tax returns. Tax correspondence with HMRC. Ensure that a tax indemnity is included in the SPA and covers all your tax risks.

This all really is a starting point due diligence is very detailed. Ultimately you need access to as much as possible and then it is a case of digging and following your nose.

In terms of valuation. Unless it is a business in serious decline the balance sheet is unlikely to give you a reasonable basis for valuation (it will likely be more). You should instead be looking at a multiple of annual profits (which varies industry to industry and by company). The profit number should not just be the last years reported profit either. You should strip out any one-off costs and sales to get closer to the underlying profitability of the business you are buying.

I hope that helps a bit. If you are spending a serious amount of money to you then I'd say you should get a proper experienced due diligence accountant (though I'm biased) rather than your normal accountant. Most non-specialist accountants will do a basic audit and call it due diligence rather than focus on the risks that arise in acquisitions and offering specific advise as to how to mitigate those risks.


Tim @ Caprica Chartered Accountants

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21st Dec 2011 09:55

Buying a business

There is some great advice on here so far. (And I do like Pawncob's suggestion!)

As has been said, the evaluation of a company is the process of due diligence and is essentially the research and analysis of a company or organization done in preparation for a business transaction. It is not a science; it is an art and to a large extent, will be subject to your “gut instinct”.

Ultimately, due diligence is the process of being sure that things are as they appear before a deal is done. For someone considering the purchase of an existing business, the review of documentation is critical.

There’s no doubt it is a complex and time consuming process. But with so much at stake, you don’t want to make a decision without all of the information and you want to be sure everything is reviewed and all of your questions are answered to your satisfaction before pressing the “go” button.

During the due diligence process, an often lengthy list of documents should be provided by the seller. The list of documents should include, but not be limited to:

Legal structure of the businessHMRC recordsInsurance policy informationOrganisational structurePersonnel policies and contracts of employmentOperationsFixed asset details and valuationsContracts, licenses, agreements and affiliationsTechnology and Intellectual PropertyCurrent or potential legal liabilitiesMarketing materialsAnything else that you think may be relevant

In todays market, buyers are having to put more emphasis on the due diligence process as finance providers are putting more emphasis on the due diligence process. But while the financial aspect is a key component, don’t overlook philosophic ideas like “fit,” “culture,” “strategy” and “the future” – so often it proves in Owner Managed Businesses that customers complain when a new owner comes in that “Fred didn’t do it like that!”.

To properly address and evaluate all of the areas of the due diligence process, you want to assemble the best possible team of people. Work with that team throughout the process to review and evaluate the documents and information you receive. If you don’t know a team, seek recommendations, not just adverts and keep an open mind. Be sure that you get all of the information you need, but don’t assume that you will find something wrong.

Although the due diligence process may take considerable time, it’s a critical part of any transaction and should be considered the foundation of the entire deal.

But one question you must always ask – and the key element of any deal – is why? Why does the vendor want to sell? From experience, it’s a sad fact that most small businesses are put up for sale because they are failing and unless you know this and have a plan and the skills to address it, the chances are, your deal will not result in the outcomes you expected.

Best regards



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By neileg
21st Dec 2011 12:39


You need a properly drawn up purchase agreement that details the warranties and assurances that the seller has given you. I have seen cases where the entire purchase price of a business was refunded due to failures in warranties.

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