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Quality Decision Making When Financing And Buying A business In Canada
How To Not Overpay When Purchasing Company Buying Business Acquisition Finance
Purchasing a business in Canada, along with financing it always makes more sense when you feel you have paid the right price for an existing business purchase. One of the biggest business news stories in the world in the last couple of days was the discovery, apparently, that one of the largest technology firms in the world had (massively) overpaid for the business.
HOW CAN YOU ENSURE THE RIGHT PURCHASE PRICE WITHOUT TAKING ON UNDUE RISK
Accusations from both sides, surprisingly, abound. And much of those accusations are pointed at the legal and accounting firms that helped with the transaction. And we have met our share of clients who are struggling and wrestling with the financing they need based on having purchased a company at the wrong price, thereby incurring a lot of debt in the process... unnecessary debt! In some cases, the valuation of intellectual property of some sort might be the challenge.
As we can imagine, it's safe to say the ' financial fur ' is flying! How then can Canadian business owners and financial managers protect themselves from these types of valuation mistakes when buying a business? Especially when they don't have access to all those high priced lawyers, accountants and valuation consultants. Those legal , tax and accounting issues around a business acqusition are important and many business owners don't have the expertise and resources in these key areas.
USING COMMON SENSE BASIC FINANCIAL TOOLS TO EVALUATE THE ACQUISITION
What to look for in financial statements when buying a business? The reality is that there are a number of common-sense financial tools that you can in fact use when buying a business and arranging acquisition finance. And they come at almost no cost! It's all about examining some very basic relationships around how a company operates, and these techniques could save you thousands/ millions.
TAKE A STRONG LOOK AT THE RECEIVABLES TO SALES RATIO
A large part of the financing you need to purchase a business revolves around the relationship of accounts receivable and inventory to sales. When you learn to interpret these properly you are well ahead of the game, and hopefully, your valuation and financing will make a lot more sense.
When you have a strong handle on the size of A/R and inventory to sales the financing you may need to finance the acquisition will simply make a lot more sense.
Let's take a look at A/R first. Most business owners know that they can measure the general health and quality of their receivables via a calculation known as DSO - Days sales outstanding. This measurement will basically tell you two things - the quality of credit that you are extending to clients and the difficulty or mismanagement that you are experiencing in collecting that sale. Pretty important stuff from a basic calculation, and as far as we have read that’s one of the key issues in that breaking news story we talked about vis a vis out tech giant’s acquisition.
ARE INVENTORY TURNS MOVING IN THE RIGHT DIRECTION
Taking a hard look at the inventory situation simply allows you to determine if inventory is in fact being moved out of your current assets into the sales and receivables accounts.
How does the business acquirer then use this information to get a strong handle on sales, collections and inventory management? It's a lot simpler than you think, and the reality is that you can even use this simple calculation to monitor your own management effectiveness. Simply construct a basic chart that shows over any specific period of time your sales, A/R and inventory amounts. Monitor and analyze the relationships of these balances.
EXAMPLE OF THE A/R TO SALES RATIO
Example? No problem. Let's say sales go up 17% and you notice that A/R has now gone up 35%... with inventory going down by 5%. Is this bad, good, or who cares? The reality is that when you spend some time and also track the data you will see that in certain cases the numbers are out of whack, thereby identifying potential problems in A/R and inventory valuation.
It's up to you as the buyer to ask the right questions then. It's all about due diligence!
In the case of our recent major news story, the accusation seems to revolve around exactly the example we have provided - i.e. the cash conversion cycle slowing down because of sales behaviour as it relates to A/R and inventory.
Is our calculation the be-all and end all? Definitely not, but it also seems like it could have worked quite well for our Tech giants analysis team, as that seems to have been the problem.
Finally, all sorts of other issues need to be looked at also, they might include revenue recognition, expenses, accounting policy changes... and on it goes.
CONCLUSION
Entrepreneurs and current business owners look to buying an existing business for many reasons, one of which is simply that there is a general perception that it entails more risk than starting a business from the startup stage. The ability to acquire a business that is generating revenues and acceptable profits is a temptation for many business people. We looked at the a/r to sales ratio as one example of evaluating a business - you also want to make sure that those same customer generating sales revenue will keep buying after the business transition.
Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in acquisition finance if your goal is to buy a business in the SME sector of Canada - small business acquisitions done right!
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Click Here For 7 PARK AVENUE FINANCIAL website !
7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
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