What questions to ask before buying a business in Europe?
October 22, 2007 2:48 AM
I'm scoping out buying a business in Central Europe. What questions should I ask to get the low down on whether the company is in good shape in initial talks with present owner?
The business is a service related one. It is a close fit with present company and we were looking to create the same functionality as this business already deals in. Quesion that I already have worked out to ask is- number of staff, profitability, liabilities, existing contracts (value, whether client has option to break contract if new owner starts), assets. Won't be my own money I'm spending, but semi-autonomous and big boss will sign off if I'm satisfied that business worthwhile.
As much background as I can give (company owner wants to keep it confidential until a done deal)- foreign(er) owned company in Central Europe. Not selling a physical product but a service. Present owner looking to sell, as far as I know, because he wants seed money for business elsewhere.
All thoughts on questions to ask, and dangers to be wary of, appreciated. Formulae for working out fair price also welcome.
The business is a service related one. It is a close fit with present company and we were looking to create the same functionality as this business already deals in. Quesion that I already have worked out to ask is- number of staff, profitability, liabilities, existing contracts (value, whether client has option to break contract if new owner starts), assets. Won't be my own money I'm spending, but semi-autonomous and big boss will sign off if I'm satisfied that business worthwhile.
As much background as I can give (company owner wants to keep it confidential until a done deal)- foreign(er) owned company in Central Europe. Not selling a physical product but a service. Present owner looking to sell, as far as I know, because he wants seed money for business elsewhere.
All thoughts on questions to ask, and dangers to be wary of, appreciated. Formulae for working out fair price also welcome.
If the company has competitors, understanding their perspective about your prospective purchase is key. Does your prospect enjoy a solid reputation with competitors, as well as with customers? If not, why not? Service companies looking to sell are generally well known to local competitors, and are usually attractive takeover opportunities for competitors, if the business is profitable and financable. If your prospect hasn't been approached by a local competitor, why not? The quick answer to that question is often that the business hasn't been on offer in the local market, for competitive reasons, but frankly, few business communities are so tight that no one but principals knows that a business for sale to foreign investors, isn't for sale to locals, competitive interests or not. This is a sensitive area to explore; you may need additional time with local bankers, business brokers, etc. Don't take easy answers, unless they are supported with facts!
How would the sale go down with key employees? Sometimes, insiders have designs on a company, if it has had a "For Sale" sign hanging out. Often, they're waiting for initial outside offers to come in, if they think the initial asking price is too high. If you show up as a deep pocketed outsider, your interest can sometimes touch off insider offers or actions that materially change the value of the target company in negotiation. If key employees aren't under contract, and aren't likely to position themselves as a competitive buyer interest, you need to understand their interests, going forward, in any transition. You may need to add key man contracts, etc. to terms of your offer, if the business is dependent on their knowledge, expertise, professional credentials, reputation and good will.
How is your prospect positioned in the market? Good to be buying the #2, or #3 vendor in a 6 vendor market, not so good to be buying #58 in a 97 vendor market, unless there is something unique about #58, and you follow up by buying #57, 56, 55, 54, 53, 52, 51, and however many more you need to be the new #2 or #3.
posted by paulsc at 4:24 AM on October 22, 2007
How would the sale go down with key employees? Sometimes, insiders have designs on a company, if it has had a "For Sale" sign hanging out. Often, they're waiting for initial outside offers to come in, if they think the initial asking price is too high. If you show up as a deep pocketed outsider, your interest can sometimes touch off insider offers or actions that materially change the value of the target company in negotiation. If key employees aren't under contract, and aren't likely to position themselves as a competitive buyer interest, you need to understand their interests, going forward, in any transition. You may need to add key man contracts, etc. to terms of your offer, if the business is dependent on their knowledge, expertise, professional credentials, reputation and good will.
How is your prospect positioned in the market? Good to be buying the #2, or #3 vendor in a 6 vendor market, not so good to be buying #58 in a 97 vendor market, unless there is something unique about #58, and you follow up by buying #57, 56, 55, 54, 53, 52, 51, and however many more you need to be the new #2 or #3.
posted by paulsc at 4:24 AM on October 22, 2007
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Audited preferably, but most of your questions above would be already answered by a review of the books and records before the fact.
I don't see any reason to have a meeting that will only lead to another meeting.
Fair value is a completely different question, and would depend largely upon answers to what you've already posted and other issues that might arise upon reviewing the books.
posted by Mutant at 3:57 AM on October 22, 2007