Is the acquisition financially feasible?
- Jelle van der Walle
- How to
- Edited 18 November 2022
- 1 min
- Selling and takeovers
Before you decide to acquire another business, you have to make sure it is interesting and feasible financially. You will have to bear all the liabilities of the other business, earn an income from it, and have the ability to grow over time. But how do you find out if the proposed acquisition is financially feasible for you? Hopefully, the insights below will help you answer that question.
You know the asking price and have insight into turnover, costs, and the value of all inventory and business equipment. But will those figures stay the same when you own the business? No. That is why it is important to convert these figures to your situation as a future owner. This is called normalising.
For example, it is possible that your fresh perspective and new approach will increase turnover significantly. But it might also drop significantly if the former owner had a close personal connection to their customers. Goodwill can be incredibly important for a company and it takes a while to build!
There is more to a business than figures alone. It is also a good idea to compare a business to industry averages. This is called benchmarking. You might find that the ratio between the turnover and the size of the building or the number of employees is completely out of proportion, for example.
You may also have to deal with entirely different costs than the seller. For instance, if you have to secure funding for the acquisition, you will have to pay interest and make repayments, which the seller might not have had to deal with. These additional liabilities will harm the company’s profitability.
Create an operating budget
Lay down your expected turnover, costs and profit in an operating budget. After crunching the numbers, you might have a good idea of the expected turnover and profit, which is important information to have in deciding whether or not to continue pursuing the acquisition.
Usually, the price you will have to pay for a business is higher than simply the value of its assets or building. In that case, you will have to find financing, but may be unable to provide sufficient collateral to a bank. A private investor, such as a family member or acquaintance, could be exactly what you need.
You will often have to combine multiple types of financing to secure enough funds for the acquisition. Thanks to special financing options for business acquisition, acquisitions that seem impossible might actually be feasible in the end.
Draw up a financial budget to break down the constituent elements of the overall acquisition price. By taking the overall acquisition price and deducting your own contribution, you will be left with your financing needs.
The importance of an acquisition consultant
It often happens that the buyer and seller reach an agreement about the acquisition price in an informal conversation. But you might still have to ask each other some critical questions later on in the process, after you have had the chance to take a look under the hood. Do not rush into the preliminary talks and have an acquisition (in Dutch) join the negotiations.