21/08/2009 by info.

It is thought that less than half of all start ups have any formal business plan, so it begs the question if they have no business plan, how do they know how much money they will need to run that business?

The fact is that they don’t! People starting business often overestimate their income and turnover and underestimate the amount of capital that is required to continue trading. This under capitalisation leads to business failures due to the owner not being able to invest money into that business.

How many times have you noticed new restaurants or retail shops open, only to close within a year, you can be almost certain that the owner fell into the category of not having a formal plan and being unjustly optimistic about their working capital needs.

The same scenario often happens with business purchases, often a business is sold on the basis that there is potential if only the owner could afford to invest, the buyer thinking they have a bargain underestimates the businesses working capital needs with the result that the new owner rather than the seller is the one who fails.

Maybe a business buyer should be staying clear of businesses sold “with potential in the right hands”, yes the owner could be incompetent without any business acumen and he might be a blithering fool. However the market (his potential customers) has already had experience of dealing with that business and has decided that they will NEVER return. So it might need a lot of money to turn this business around and persuade the market that things are now different.

So why not take this money you will need to invest turning around a business with potential and simply buy a more expensive business one that is generating profits and needs minimal investment.

If you don’t have the funds to do so, conceivably this is an indicator that you are under capitalised and will get into financial difficulties buying that business with potential.

Posted in Buyers | 1 Comment »

06/08/2009 by info.

Many business owners try to sell their business using smoke and mirrors. Hiding the fact that their business during the recession is not doing as well as it has done in the past. They claim a certain turnover but cannot provide any documentary evidence to back up these claims.

Business owner may present historical financial accounts to show that the business is capable of obtaining a certain level of trading; these historic figures are no guarantee of future performance.

But how accurate are these accounts?

One thing to remember is that an accountant will simply prepare accounts based on the information provided to them so there is no guarantee that they are accurate. Perhaps the best way of assessing how accurate they are is to ask to look at the books, if the books are kept well the chances are that the accounts will be “honest”.

I trained as an Accountant in the late 1980’s and prepared plenty of accounts, most of the small business accounts I prepared were from incomplete records. Often these accounts cannot have been 100% accurate as the information and explanations from the client may not have been accurate.

Also on one occasion when selling a business, an owner presented to me accounts showing an immediate jump in turnover of some 20% from the previous year, the business was sold on this basis. The new owner made a comment to me later when he wanted to sell the business that there was no way that these accounts were accurate, and that he had been “stitched up like a kipper”.

Cash takings are involved with many businesses and also the financial accounts will include “one-offs” or discretionary expenses that are not strictly necessary for the production of income. Often the profit stated in these accounts can be understated and if taken at face value can lead to many great businesses being turned down.

And from the sellers point of view the fact that they have tried to reduce their tax liability by introducing private expenditure into their business account, or by understating their turnover may have backfired.

Accounts unless they have been audited, (and that only applied to medium and larger sized businesses); often need to be looked at with a pinch of salt. They are an important part of the due diligence process but not the be all and end all of any buying decision.

Posted in Selling Your Business, Buyers, General | No Comments »