What Financial Considerations Are Important When Buying A Company?

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For the budding entrepreneur, buying an existing company may be a better call than starting a new company from scratch. Here we look at the advantages of acquiring a business, the financial statements you need to check to exercise due diligence before making a final decision, and whether you are in a financial position to take on this responsibility. These aspects will prepare you for looking at different firms and becoming a business owner.

The Advantages Of Buying A Company

There are numerous advantages to taking over an existing business rather than building a new business from the ground up.

If the company you choose to buy is doing well, it is already generating an income to pay employees, suppliers, and any loans that have been taken. There will also be existing lines of credit. While doing your due diligence, you will pick up on areas you want to improve. Provided the firm is not on the brink of bankruptcy, this can be an exciting challenge.

You benefit from an established market and products or services. Instead of looking for customers, they already exist and know the business. This means that you are not marketing a brand new product and have already achieved some level of brand awareness. You will need to create your own marketing strategy going forward.

Financial Statements

There are numerous aspects to due diligence. We will take a look at a few of the financial statements you need to check. For more information and a checklist see Poe Group Advisors CPA firm acquisition due diligence checklist.

The first statement to check is the balance sheet. It should be examined in the following categories: cash, accounts receivable, inventory, equipment, and liabilities.

You should examine the Income Statement and Operating Ratios next. Items of interest are the cost of products sold ratio for the past three to five years, gross margin, break-even sales volume (net sales), and fixed cost.

The Profit and Loss (income statement) will tell you if the existing owners made more than they spent, which is good. If they spent more than they made, they would likely have an overdraft, which is a liability.

The Cash Flow report will indicate how well customers are paying their accounts. When a lot of accounts are on credit, there may be a low cash flow and an inability to keep operating, e.g., to pay suppliers on time.

Can You Afford To Buy The Company?

Finally, you should consider whether you are in a position to make the purchase. You may have several avenues of income available to you such as an investment or retirement fund, securities in stocks and bonds, or the ability to take a bank loan. The most important question is whether or not your income from the business will enable you to pay the bank back if you have to borrow money.

This will depend on the due diligence homework you have done. You should have considered the future of the market or industry of the business you are interested in and its stability to continue once you take over.

Keep a level head, get an accountant to look at the books for you if you need a second opinion, and make your decision.