How to Avoid Buying a Pig in a Poke
Buying a business can be a daunting task. The buying process involves many steps and it is, therefore, possible to overlook some details and end up buying a pig in a poke. In general, most buyers get the help of professional intermediaries – accountants for verifying inventory, accounts receivable and payables, a law firm for dealing with the legalities and a business broker for negotiating the deal.
And even with these professionals at one’s disposal, it is very useful for the buyer to know what areas of business to look at and prevent finding any skeletons in the closet down the road. Similarly, sellers possessing the knowledge of what buyers might be interested in looking at can leverage this notion in further preparing the sale of their businesses and eliminating unexpected surprises.
The four areas of concern are – business’ finances, management, buyer’s finances and marketing. Taking a closer look at these areas will enable buyers, who may not know the real reason the business is for sale, to see beyond words of the selling party and smoke out the real reasons for sale.
- Does the firm have good cash management and solid banking relations?
- Are financial statements current and audited?
- Is company profitable and how do the expenses compare to industry benchmarks?
- Is management constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates?
- Is there a lot of change or turn-over in key positions? Little to no change in senior management may indicate stagnation.
- Are the employees upbeat and positive?
Most sellers assume without hesitation that buyers have the necessary funds. It is a good practice to verify that with the buyer in your sale as well.
- How does the business stack up against the competition?
- How about the market share and does the firm have new products being introduced on a regular basis?
Doing one’s homework and verifying the above information will help buyers avoid buying a pig in the poke and make sellers aware of the potential bottlenecks of their businesses.