Call 1300 699 480
Risk assessment of a business | Print |

Prior to listing a business for sale, the owner should assess the various positive and negative attributes of the business. These attributes include:  

  •     Supplier Relationships
  •     Customer Relationships
  •     Competitive Advantage 
  •     Direct Competitors
  •     Security of Tenure
  •     Systems and Staff
  •     Operational Capacity
  •     Role of the Owner
  •     Financial Stability
  •     Working Capital
  •     Debt Funding Capacity
  •     Popularity of the Business
  •     Threat of new Entrants
Let's deal with each of these items in turn:


Supplier Relationships

Is the business dependent upon just one supplier (high risk) or are there many alternate suppliers (lower risk)?

Customer Relationships

Does the business depend on just a few major clients for its income (high risk) or does the business sell to a large client base?

Competitive Advantage

What makes this business better than other similar businesses? Does it have a unique position? Is it a market leader? Is the location or lease a key factor?  

Direct Competitors

Does the business have only a few direct competitors or are there many competitors selling the same type or range of product?  

Security of Tenure

Does the business have a lease for the premises occupied to ensure FME (Future Maintainable Earnings)?
    Is there a reasonable period of lease remaining?
    Is there an option period or a new lease available?
    Is there a demolition clause or relocation clause in the lease?
    Is there a need for a refresh or a refit of the premises in the near future?

Systems and Staff

Does the business require skilled staff with special qualifications? Does the business have the applicable permits and systems in place to ensure:
    proper food preparation
    the legal sale and/or serving of alcoholic beverages
    the proper storage and supply of dangerous goods, etc

Operational Capacity

Is the business operating at full capacity or is there an opportunity for a new owner to increase production levels or sales without drastically increasing expenses?

Role of the Owner

Does the owner have a special skill or licence that is required to operate the business, such as a BSA license, electrical or plumbing trade qualification, liquor licence, etc that a potential buyer must also have to effectively operate the business.  

Is the business actually fully managed with the owner only supervising the business operation or is the owner a ‘hands-off’ investor with no input into the business operation?

Financial Stability

  1. How many years of financial records are available?


  2. What are the quality of the financial records supplied:
    •     Tax Return Financial Statements applicable to only the business being assessed?
    •     Owner’s Management Accounts with BAS reports?
    •     Special Purpose Financial Statements from the Accountant?
    •     Excel spreadsheet with no BAS Reports?
    •     Handwritten records?
    •     No financial records available?
  3. Are the business sales, expenses and net profits reasonably consistent each year over the past 3 years? Are sales and profits increasing or decreasing over the past 3 years and if so, why?


  4. What Financial Adjustments can be identified and added back to the profits as:
    •     Income Tax paid
    •     Interest paid
    •     Depreciation
    •     Amortisation
  5. What Items of Expense shown on the Profit and Loss can be considered as unique to the owner and added back to the profits?

Working Capital

Does the business require substantial additional funding for carrying high levels of stock and/or debtors (clients that owe money to the business)? 

How much does the business normally owe creditors and what are the normal terms offered for the purchase of stock? Will the same terms be available to a new owner?  

Balance sheets are required on many businesses to ascertain the:
  • amount of debt owed to the business by customers and what level of bargaining power do the customers have to gain better terms and discounts on purchases from the business?
  • amount of debt owed by the business to creditors/suppliers and how strong is the business owner's bargaining power to gain better terms and discounts for purchasing stock from these suppliers?
  • an aged debtor and creditor report may be essential to the sale of many businesses due to the amount of extra funds a buyer will need to operate the business, thus affecting the Return on Total Funds invested.
  • amount of stock at cost held by the business

Debt Funding Capacity

Does the business have any capacity for bank funding secured by the business or business assets only? This would mean that the buyer would have less funds to raise themselves and may open up a larger amount of potential buyers.  Most banks will consider not only earnings but cash available after funding replacement of assets, growth of stock and working capital as well as paying taxes.  There has to be enough left to pay the interest and principal over a reasonable timeframe and a reasonable dividend to the investor.

Popularity of the Business

Is there a demand for this type and size of business? Is the business located in a desirable suburb or will response be very limited because it is in a regional area?

Threat of new Entrants

Is there a threat of substitute products (eg made in Asia) or new competitors entering the market that the owner may know about (example – local hardware store with a Bunning’s store opening soon in same area)?

 

Image credit: www.freefoto.com


 
[ Back ]

Registered Users

Contact us

Online Form...

Phone:
1300 699 480

Fax:
(07) 3297 8755

Address:
8 / 130 Kingston Road
Underwood  Q  4119

Postal Address:
PO Box 1322
Springwood  Q  4127

Our Team:
Ron Frank
Shane Dingley
Corey Pollock
Pam Frank