So you’re looking to expand by acquiring another business. You likely know you need to conduct a thorough investigation of the targeted acquisition as well as your own resources. But you also will need to know exactly how the purchase will be a catalyst for enhanced profitability. In other words, know what you’re buying. For this, you need good advice.
Such transactions are typically purchases of the assets of another operation – including intangibles, such as its trade name and customer base, which should play nicely with the brand image of your existing enterprise. In establishing a reasonable purchase price, hard assets like equipment and inventory are much easier to measure; interestingly, it’s the intangibles that are the most complex factors in an acquisition.
Purchase price: The general discussion phase of an intended acquisition involves accepting the seller’s verbal conveyance of revenue, gross profit, net profit, and asset values. After a purchase price is agreed to, the target business will present its formal financial statements. Note that recent quarterly financial data are especially valuable for assessing trends and seasonal factors.
Synergies and potential issues: In making a final decision, you’ll want to blend the historical results of the targeted business with your current operations to identify cost reduction synergies and potential customer attrition under the new ownership. Projected revenue and expenses of the combined businesses should demonstrate sufficient cash flow to repay any debt incurred for the purchase, as well as generate a reasonable return on investment. Your accountant is the best resource for these calculations.