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Purchasing a business in Canada, along with financing it always makes more sense when you feel you have paid the right price. One of the biggest business news stories in the world in the last couple days was the discovery, apparently, that one of the largest technology firms in the world had (massively) overpaid for the business. 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! 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 prices lawyers, accountants and valuation consultants. The reality is that there are a number of common sense financial tools that you can in fact use when buying 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. 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. 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 effectivness. 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? 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. 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 behavior 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 of 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. Bottom line - spending some time on the numbers will help you make a better decision when purchasing a company and financing any acquisition, large or small. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in acquisition finance. Stan Prokop - founder of 7 Park Avenue Financial – http://www.7parkavenuefinancial.com Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 9 years - has completed in excess of 85 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing. Info re: Canadian business financing & contact : http://www.7parkavenuefinancial.com/purchasing-company-buying-business-acquisition.html
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