We all know that when a buyer aspires to purchase a product-based company, he/she is literally buying the assets. What when it comes to buying a service company? There are no assets to buy, rather the buyer may look at the cashflow status of the company. The cash flow must be good enough so as to justify the asking price, though it may be on the higher side at times. It’s the cashflow that determines the value of any business. It takes care of funding the debt service, managing operating expenses and employee wages, you name it.
Good financial records form the basis for a buyer to decide upon the prospects of purchasing a company, small or large. Every business, as a matter of fact, works under the same premise. When it comes to service industry especially, it is important to take a closer look at the profit and loss statements, tax filing returns and balance sheet for the last three years and the current year to stay in the game. Financial institutions will be willing to loan service businesses but they still prefer business with assets so that they can lay their hands on in the case of a buyer defaulting on the loan. Ideally, they’d look for a seller who can guarantee this as much as possible.
The buyer generally needs to undergo training with the seller for a certain time period, though the training period will be different for different businesses. The buyer by then would get acquainted with the seller’s company employees, clients and stakeholders. No seller would want to burst the bubble quickly that the company’s ownership has been transferred to a new owner. This said it’s also important for the clients to have full confidence in the new owner after the training period is over.
The new owner should be able to take care of all their needs. During the diligence, before closure, the buyer has to investigate the customers, supplies and contracts, besides the financial records. The new owner also has to understand that making drastic changes to the company structure, operational process and team might prove detrimental to the smooth transition of ownership. Change at times can be repulsive, therefore the right signal should be sent to the relevant stakeholders. Employees must be at ease during the transition process as expectations of a secure job and career aren’t going to be less.
Before purchasing any business, it is important for the buyer to analyze competitors, both online as well as offline, and depending upon the competition level, the right decision should be made so as to not get into a highly competitive space.
We have already discussed the importance of business plan in the previous blogs, and therefore the design of the right business plan is important if the buyer is seeking financial or loan assistance.