Buying a business is one of the greatest financial choices that you can make. Be it a first-time investor or a seasoned investor who is willing to diversify his or her portfolio, understanding how to review a business prior to acquiring it may make the difference between a clever and an expensive error. In the dynamic market of India, when there are equal opportunities and threats, due diligence is not only advisable but necessary.
And now we are going to go through the highlights of the things you must examine before you put your signature on the dotted line.
Question the owner, Why? – Why Is the Owner Selling?
This is the initial question to be posed, and you should pose it more than once. Business owners sell businesses due to many reasons, which include retiring, health conditions, a change of location or just the desire to move on to another thing. Sometimes, though, a less flattering cause is the cause of reduced sales, a new competitor, trouble with regulatory bodies, or a dying industry.
Do not accept the first answer. Dig deeper. Communicate with employees when you have an opportunity, talk to suppliers, and even have a casual conversation with neighbouring businesses. The one that people tell casually is often extremely disparate from the smooth pitch that you are going to hear in a conference room.
Get Into the Numbers – Seriously.
Any business evaluation is based on financial analysis. Demand a minimum of three years of financial statements – profit and loss accounts, balance sheets and cash flow statements. Many of the small and medium businesses in India have informal accounts in addition to their formal ones; be ready to reconcile the two types of accounts.
Key things to look for:
- Revenue trend: Is the business increasing, staying the same or decreasing?
- Profit margins: Are stable, good or intermittent?
- Outstanding debts and liabilities: Does it owe any loans, payable vendor dues or litigation claims?
- GST returns and ITR filings: These are the most appropriate measures of actual revenue in India.
In case you are not a finance person, have a chartered accountant who will take you through the books. This cost is always worth it.
Know the Business Model and Operations.
Arrange the numbers according to what has happened. The business model gives you answers to why and whether it can repeat under your ownership.
Ask yourself: Is this a systems business, or is it a business of the owner? When the owner is the business – the face, the relationships, the expertise – then as soon as they walk out, so does the value. You desire an established process of doing business, a staff that can be trusted and the kind of customer relationship that is not wholly personal.
Also, look at the supply chain. Who are the key suppliers? Do we have any long-term contracts? What will become of it in case a large supplier leaves?
Legal and Compliance Checks
This is something that is non-negotiable in India. There is an aspect of legal baggage that is latent; as soon as businesses are taken over, they pass their liability on to you.
Check for:
- Outstanding lawsuits or disagreements.
- Intellectual property ownership and trademark.
- Property or lease contracts – and their transferability.
- Licenses and permits (FSSAI, Shop Act, factory licenses, etc.)
- ESI compliance and the Employee Provident Fund.
Hire an effective attorney who deals with business transactions. They will be informed where to seek and what to watch out for.
Evaluate the Competition and the Market.
A business may appear fabulous on paper, but it might be dealing in a market or stiff competition that it might not have revealed. Do your own market research. Study industry reports, talk to individuals in the industry and determine competitors.
Question: Can this business be expanded, or are you basically purchasing a sinking ship that still looks like a ship on the outside?
Converse with Customers and Employees.
Most buyers overlook this, but it is very important. As far as you can do it, talk to some regular customers, not to disclose that you are planning to make a purchase, but to learn their level of satisfaction, their loyalty and what makes them visit the place again.
Likewise, an interview with some of the key employees can give an insight into the culture, internal issues and the possibility of the team staying after the transition. The loss of key personnel after the acquisition can doom the operations to a significant degree.
Value the Business Fairly
After doing all your research, you must come up with a reasonable valuation. Some of the popular approaches applied in India are: asset-based approach to valuation, earnings-based (such as EBITDA multiples) and market comparison. It is not enough to trust what the seller says and have an independent business valuation conducted.
Conclusion
It is not only about being able to crunch numbers to know how to evaluate a business before buying it, but it is also about the ability to ask the right questions, people, and look beyond the surface to what a business really is. That competence can spare one a grave financial regret in the dynamic and diversified market in India.
And when you want to do real business with real people who have been tested and proven, MatchValley should be the search engine where you find it easier and more visible. You’re either selling or buying. MatchValley gets serious stakeholders together and assists in making sure that both parties involved possess the clarity they need to make a confident decision.
