Serious buyers will carefully examine the financials of a company and all other major aspects. However, there are a few areas that sellers may overlook but buyers will investigate:
The Industry: Buyers will scrutinize the industry, customers, suppliers, and competition, assessing strengths, weaknesses, threats, and opportunities. With the rise of ‘big box’ retailers, power has shifted from manufacturers to retailers. A manufacturer may want to increase prices, but if Walmart says no, it’s a very powerful no.
Discretionary Costs: Some sellers reduce expenses in areas like advertising, public relations, and research and development to boost the bottom line. However, these cuts can hurt future profits, and smart buyers will notice.
Obsolete Inventory: Buyers will examine inventory to ensure it is usable, current, and saleable. No one wants to pay for outdated or unsellable stock.
Wages and Salaries: A company may pay minimum wages or offer few benefits, making the bottom line look good. However, this can lead to high employee turnover and future problems. Compensation issues could be critical if the target company is to be absorbed by another.
Capital Expenditures: Buyers will closely inspect machinery and equipment to ensure they are up to date and competitive. Replacing outdated equipment can affect projections and the offering price.
Cash Flow: Buyers will analyze cash flow statements to ensure the business will continue to generate positive cash flow after the acquisition, including servicing debt and paying a reasonable salary to the owner or general manager.
Other areas that sellers might overlook but buyers will not include internal controls/systems, financial agreements with lenders, governmental controls, antitrust issues, legal matters, and environmental concerns.
Contact Jim Bates to learn more about strategies for buyer discussions.