Today’s article is a part of the Forward Thinking Education Series presented by Legacy Bank, the Latino Chamber of Commerce and the Pueblo Chieftain. Webinars further discussing related financial topics can be found on the Latino Chamber of Commerce FaceBook page at: https://m.facebook.com/PuebloLCC/
If you’re entrepreneurial minded with access to cash or financing, you might be viewing the pandemic as a great time to buy a business. For purposes of this discussion, we will assume you have identified at least one existing business with an established name and reputation, plus a seemingly proven product line or portfolio of services. It should already occupy a suitable building or store front and have the necessary equipment to operate. We will also assume you plan to be an owner-operator.
It is imperative that you collect organizational intelligence on any business you are considering. Obtaining this information will most likely require the sharing of proprietary data. As a result, don’t be surprised if the company asks you to sign a non-disclosure agreement (NDA) protecting any confidential financial or operating information you might be given access to. At the outset, this might include a copy of any documents relating to the firm’s business structure such as bylaws, resolutions, operating agreement and stock ownership if this is relevant. This will confirm the seller’s ownership and its authorization to sell.
“You, as well as prospective lenders or investors, will want to review tax returns, annual profit and loss statements and summaries of operating expenses to see the business’s financial health before and during the pandemic,” says Mitch Brown, Branch President of Legacy Bank. “A month-by-month profit and loss statement more clearly depicts how and when the pandemic might have impacted the business.”
It’s equally important to evaluate aspects of a company’s operation that aren’t specifically portrayed in the financial statements. Does it have any proprietary or patented technology or products that create a long term market opportunity and an edge over competition? Along with that comes the question as to who is the competition and how have they fared during the pandemic. If the company is enjoying strong sales during the pandemic, is it because of the products or services they offer and will these remain in demand as the pandemic subsides?
"Always analyze the customer base," comments Brown. "Are sales spread about equally among customers or are there large customers that represent the lion's share of sales; if so how are those firms doing during the pandemic? Does the business have any long term contracts with them and can they be met?"
For some businesses, a critical aspect of meeting customer demand and growing a business is its relationship with key suppliers. These agreements should be reviewed, as well as, gaining a perspective on whether the pandemic has impacted their ability to provide products and services necessary for growth.
"The financial statements reflect employee salary and benefit costs but do not show some of the more important employee related topics," notes Brown. How many workers have skills and experience critical to the company’s success? Do any employees belong to a union and what are the terms of that contract? When does it expire? For some businesses it is important to know if employees have been working from home, if they should continue to do so and if the company is picking up their work-from-home related costs such as phone and internet.
Don’t forget to determine if the business is involved in any unresolved litigation and what if any financial exposure this might create for your ownership. Finally, it is important to understand if the organization has any long term assets, such as real estate. Recent market corrections may have had an unexpected impact on the value of those assets, especially if one plans to borrow against those assets.
Mitch Brown is the Branch President of Legacy Bank Pueblo West and has over 16-years in banking and finance. Mr. Brown holds a Master’s Degree in Business Administration and is an active part of the Pueblo West community. His involvement includes Rotary Club Pueblo West and YoungLife among others.
Article Published on The Pueblo Chieftain here.