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Audits, Business Analysis, Evaluations and profitability analysis
Everyone knows that when you buy a business you need to have an audit of the books to see where the seller is lying, not if he is lying. What is less understood is that a business analysis is even more important and should be done before spending lots of money on an audit. An analysis tells you the viability of the business. Is the industry shrinking? Is this company becoming antiquated because they make parts that China or India is now producing for a quarter of the price? Is the management team inept or worse, stupid?
An evaluation of a businesses worth should not be just based on the financials, which is what almost all appraisers use. It must be based on how viable the business is. Will it survive in this economic condition? Does it have some uniqueness to it that it can compete successfully in a highly competitive market? Financials are a representation of the past and only give a possible indication of the future.
A profitability analysis is an important tool that should be used when buying a business. It tells you the probability of a company surviving and flourishing in this economy. The fact that a business is here today is not an indication that it will be here tomorrow. Business buyers must always remember that there is a reason a seller wants out, and it definitely not the reason he is disclosing.
So you want someone to audit the books of a company you are interested in buying? That is great and it is definitely important. Before doing that you should think about doing a business analysis. This is the first step to then doing a profitability analysis. Why buy a profitable business is its life expectancy is two years due to outside influences?
