Understand The Outcome of a Takeover

If you are trying to take over a small company you will get a series of figures from their financial people that paint as good a picture of the company’s finance as a half decent accountant can conjure up.  Always make sure that the figures you use to make your judgment on the value of the business are right up to the minute.  It is too easy for your target business to demonstrate reasonable figures for the quarter before last knowing that the last quarter was a different story.  You may pick that up if you go to the expense of doing proper Due Diligence, but by that time there is agreement over the amount that they are expecting you to pay.
Take their figures and turn them into a monthly cashflow document.  Look carefully at the overheads because that is the first area where you may be able to make substantial savings if you do buy the company.
Separate out expenses on premises and the cost of administration.  With regard to premises, work out if you could integrate the people and stock you are taking over into your own premises.  If you can, then look hard at the leases they have signed up for.  Suppose there is still six months to run on a lease on premises that you do not need.  Negotiate with the leaseholder.  If there is a sniff that the target business may go bust then they will probably be open to offers that guarantees that they get paid what they are owed in return for waiving, say, the last quarter in the contract.  Now look at administration: it is likely that you can subsume their administration into your own or one of your other companies without any extra cost.  At a stroke you have improved the performance of the target company by stripping these two items out of their costs.  Look carefully at their insurances – again the combination of two companies together can often lead to savings.

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Tip from Shaf – Keep your cards close to your chest
When you are negotiating to buy a business never tell the seller about the short-term savings you will immediately be able to make.  You want them to accept that the current costs of the business will remain and the profitability of the business will stay as it is or go down.

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I recently looked at a company that made its money out of servicing and repairing air-conditioning systems.  I noted that the stock, or inventory, figure did not change very much from month to month, but that they were buying spare parts to carry out repairs on a regular basis.  I went to look at the stock with someone who knew the air-conditioning business well.  We discovered that the stock on the balance sheet might at some point have been worth the quoted value but that most of it was out of date and would never be used or sold on.  The real value of the stock was more or less nothing.
In this case it was, as is often the case, better for both the current owner and for a potential buyer to let the company go and buy the bits that were valuable from the receiver.
 
Don’t get blinkered by the current performance of a potential takeover, concentrate on the outcome - how it will be in the future if you combine it with another organisation.