Don’t get conned
Wednesday, February 7, 2007/
The year ahead is a minefield for prospective business owners … but forewarned is forearmed.
This year will see the exodus of a significant number of founder-owners from smart companies who realise that they only have until the end of this financial year to gain the benefits of a million dollar tax-free dump into their superannuation funds.
At the same time, the rush of private equity funds seeking to consolidate 10-20% growth in sales will create a market for good companies that can benefit from the introduction of professional management after years of family-first business decisions.
But watch out. Many companies will be quickly dressed up for a quick exit. The biggest risk this year as the massive changeover in business ownership accelerates is that many buyers of businesses will be conned.
The best clue to explore in any due diligence undertaken before acquiring an existing business is to go through the company’s efforts at risk management and the details of their situational audits included in any sales prospectus.
Given the last five years of market growth and cashed up business operations, it is too easy to take a trend-line approach that projects the last few years into the future without paying due attention to the correction that will come this year, even with a federal election handouts bonanza.
Ask around the related industry associations to get an independent risk assessment of any business that looks too good to be true.
The first place to look for smoke and mirrors and financial padding is in the pattern of premiums for insurance and occupational health and safety.
The best companies can demonstrate a declining cost of doing business per employee, lower rates of staff turnover and decreasing rates of returns, write-downs and discounted sales to get volumes.
The worst performers in the coming year will be those business units that have failed to keep up to date with their reporting requirements, BAS statements and/or have a lot of new staff and high work place injuries.
Companies that have reached the top of their own innovation curve and have not invested in research and development, market research and customer relationship management may be found to have dressed up the business for a quick exit before the next tax audit.
It is important to arrange a meeting with the major customers — and not just the franchise owners and their accountants — to gain a real situational audit of the way that the company is growing or going.
How have costs been reduced at each stage of the production process to give the business sustainable prosperity rather than a good price-to-earnings multiple that will not last the distance.
Do you have good risk analysis systems in place? Try our skills quiz: Have you done a risk audit?
Marshall Place Associates offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship.
Contact: CEO Dr Jane Shelton, Phone +61 3 96400099 Email www.marshallplace.com.au