We’re headed into some period of economic uncertainty. History tells us that there will be opportunities to buy businesses at discounted rates. They’ll be struggling with cash flow and will enter the market at a steep discount.
When you evaluate an opportunity, make sure you look at the fundamentals, not just the shiny parts. Solid fundamentals will give you more flexibility to make better decisions.
There are several important fundamentals, but these are two that are important if you’re going to make it through some economically rough waters.
If the business you’re looking at carries debt, are the current lenders solvent enough to renegotiate with you? Do the lenders have a vested interest in the company’s success? Or, will they be tempted to vulturize the company — foreclose on it and sell it off even if they lose part of their loan amount?
Product and Service Lines
You should also evaluate the business’ product or service lines. In times of “irrational exuberance,” it’s easy to expand the offerings, test ideas, and launch the boss’ pet project. Now’s the time to ask critical questions. Which ones are the most profitable? Which ones are taking an inordinate amount of staff time? Which ones does your audience need right now? Are there extra things that can be eliminated in order to improve the bottom line?
Let me tell you a story about a client I talked with yesterday. He is in charge of huge resorts that host events, including a lot of destination weddings.
They already know exactly how to respond if people stop booking their venues.
In his case, they know they can survive a drop in business because they have low debt and low operating costs. Yes, they're going to have to lay off some employees if it happens, but the company will survive until the economy is healthy again.
Why are they so confident in their future? They just went through the same process due to COVID. As soon as the word “shutdown” started being whispered in 2020, leadership sat down in a conference room, ordered some catering from the kitchen downstairs, and stayed for four days in order to develop their contingency plans.
Once the lockdown actually happened, they took drastic actions, but it worked. Through that experience, they learned what it takes to pare down their costs and ride it out, no matter how bad the economy gets.
When COVID restrictions lifted, they quickly became one of the biggest venue operators in their regions because their fundamentals (and resolve) were stronger than their competitors.
How can a CPA help you buy a business?
Every investment option has tax implications. Many of them are designed for your benefit! You should be asking, “What are the tax implications of this purchase? Which investments are more tax beneficial for me?” The answer can make a huge difference in your Return on Investment (ROI). Our tax professionals can help you answer those questions.
However, the timing is critical. Most people don’t talk with one of our tax planners until after they’ve bought. When you come to us a few months before you buy, we can help you significantly, just in the way the purchase is structured. If you wait until after the purchase, the impact we can make is much more limited. Bringing us into the purchase process too late is an expensive mistake.