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By Geoff Coy, Certified Practising Accountant
Recently I was asked to act for a client - let’s call him Zack - who was keen to purchase a service station after a long absence from the industry.
The client had been negotiating to acquire the lease of two separate sites, only to see negotiation break down as a result of a lack of financial information provided by the vendors.
In the first instance, the vendor was not prepared to make available any financial records at all due to some impending legal action. He was only prepared to provide dip and meter readings to support fuel sales and no financial information at all to support shop and workshop sales.
In the second instance, monthly sales records were made available by the vendor but annual financial statements had not been prepared by the accountant for several years because of a partnership break up between the vendor and his previous business partner.
Despite the lack of available financial information, Zack was keen to continue negotiations because he was confident in his own ability and could see the potential in operating the respective businesses.
A business plan and cash flow statement were then prepared from all the known income and expenditure information made available, to determine whether the businesses would be a viable proposition to Zack and his family.
Whilst the business plan and cash statements produced positive results and indicated that Zack would be able to recoup his investment over the required period of time, a number of financial institutions that were approached by Zack didn’t see things the same way and were not as confident.
Prospective buyers and their financiers generally want to see financial statements or some form of financial analysis with two to three years’ history. This is where an accountant is required to provide the information which supports the asking price.
One common problem in buying or selling a business is the value the vendor places on the business assets. Usually these values are inflated because they are based on emotional and not objective values. This is not to say that the final value is wrong but the approach in getting there may be.
This point is usually highlighted when the vendor takes the potential buyer aside and tells them that the business profit is higher than that depicted in the financial statements, that is, the business is worth more then the formal valuation.
Often the vendor values the business assets and in particular the goodwill on an emotional value or a value he requires to pay off business debts. This value can have little to do with business profitability.
If a vendor is serious about selling a business and wishes to do so in the shortest possible time, then he should make the following information available.
• Current year’s financial statements and
tax returns;
• Financial statements for the previous two financial years;
• Computer Sales Reports;
• Daily Control and Shift reports;
• Monthly Management Reports.
In both of the above instances negotiations broke down when Zack’s bank refused to lend him any money to acquire the businesses, due to the lack of up-to-date financial information being made available.
Zack continued his search for a business and finally found one associated with the service station industry which met his requirements.
Unfortunately, the bank once again declined to provide finance on the grounds that the vendor could only provide financial statements up to 30th June 2002.
Though the bank was provided with up-to-date turnover information, they believed that the Net Profit depicted in the 2002 financials was insufficient to meet Zack’s business loan and personal commitments.
Zack was forced to turn to a relative who was prepared to lend the required funds on a short term basis until a favourable track record of trading performance could be produced to the bank.
Six months later and armed with up-to-date and accurate monthly management reports for his business and a revised business plan, Zack is now in the process of applying for a business loan to not only pay out the short term finance to his relative but to also provide additional funds for expansion.
Buying and selling is serious business, so it is important to receive good advice and information.
As far as the vendor is concerned, some homework and planning is required as it is important to have all the information available the purchaser may require in order to avoid the potential loss of time involved in the negotiation process and application for finance.
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