Quick check for the audit of a target company
Admittedly, it is difficult enough to find a suitable company for a business succession from the desired sector and region at the right time. But even if an apparently suitable candidate has been found, a number of criteria need to be checked quickly in order to avoid costly mistakes and not to waste time with unsuitable purchase candidates. I have outlined below 5 criteria that every MBI candidate can quickly check.
1. are there meaningful documents available?
If an entrepreneur is seriously interested in selling his company, he should have prepared meaningful information about his company. Ideally, he should have an exposé or information memorandum containing details about the business model, products or services, customers, suppliers and, of course, financial data. In any case, he should be prepared to make available - against the signing of a confidentiality agreement - the prepared business figures of the last three years including the current figures of the current year. Since an acquirer wants to get a picture of the future development, there should at least be an outlook for the next 2-3 business years. If the seller does not provide the aforementioned information promptly, only incompletely or in a form that is not meaningful, this is already a first important warning sign.
2. has the company been profitable in the past three years?
Provided the target company has reported losses in the past three years, caution is at least advisable. Of course, restructuring cases can also be attractive in the case of moderate purchase price demands. However, it becomes complicated if the company is unprofitable. The acquirer should then have appropriate restructuring experience. Financing the purchase price through bank loans is regularly associated with great difficulties. In these cases, the business plan often assumes strongly increasing but highly uncertain profits in the following years. Last but not least, the payment of an adequate entrepreneurial wage is initially impossible. Adequate profitability of the business is therefore usually a basic prerequisite for a successful business succession.
3. is there a serious intention to sell on the part of the owner?
For a prospective buyer it is of great importance to quickly recognise whether the seller is seriously interested in a sale and is also internally determined to do so. Otherwise, one spends time and money on an ultimately useless company audit. Unfortunately, it is not easy to recognise the seriousness of the seller in time. Indications are, for example, poor or missing preparation of the sales documents. If the seller has already been looking for a successor for a longer period of time or has already broken off sales talks, one should be alert. If the seller has a successor advisor on board, this is usually a good sign. If there are doubts about the seriousness of the intention to sell, the seller and buyer should look each other deeply in the eye in a personal meeting and address the concerns openly. In the end, it all comes down to the prospective buyer's knowledge of human nature and experience. If, on the other hand, the buyer has fundamental doubts about the willingness to sell, it is better to focus on another target company and not hold on too long to a hopeless candidate.
4. does the seller have a realistic assessment of the market value?
According to surveys, about 70% of medium-sized business owners estimate the value of their business too high. The probability is therefore very high that a prospective buyer will be confronted with an excessive purchase price demand, which is often fed by a wishful thinking of the capital needed for the owner's retirement provision. A prospective buyer should therefore be familiar with the basics of business valuation. In any case, it is advisable to have current sector- and size-specific valuation multiples in mind. It is then quite easy to determine whether the purchase price demand is reasonably in line with the market. If this is not the case, the acquirer should not hesitate and communicate the discrepancy in good time so that the further company review is not carried out on a false basis.
5. is the company capable of succession?
Finally, the most important question of the quick check has to be answered by the transferee's gut feeling: can I imagine stepping into the role of the entrepreneur and successfully managing the generation change? Every transferee must ask himself the following questions: Does the company have sufficient size or is the dependence on the owner too overwhelming? Do I have the confidence to bind customers, suppliers and employees to me personally as the future entrepreneur? Is the business model really sustainable? Does the company's earning power allow for the payment of an appropriate, risk-adequate entrepreneurial wage?
Anyone who can answer yes to these five questions with a clear conscience has found a company that is worth investing time and resources in examining further.