Don’t buy a ‘pig in a poke’

2008-04-22 00:00

The expression “a pig in a poke” means to buy something that has yet to be examined. Last week I looked at some considerations of buying a business from the perspective of determining a value or realistic buying price.

One of the most important considerations with regard to this is to ensure that, indeed, you don’t buy a pig in a poke.

This means, once you have set a tentative buying price, you need to establish whether the business is truly worth that price.

The term used to describe this process is called “due diligence”.

If the seller is serious about selling his/her business, they should be willing and supportive of your investigation.

In respect of due diligence, if you are not an accountant, lawyer or highly competent at interpreting financial statements yourself, spend the money and employ a professional to carry out this task — you could save yourself a lot of money.

The size of the investigation will depend on the nature and complexity of the business. At the least, it requires evaluation of the business’s funding, analysis of future prospects and, most importantly, establishing ownership and value of the company’s assets, both fixed and current, and the extent of its liabilities.

Don’t assume that the business owns the assets you see within its framework. It may not. Ownership could rest with a completely separate company.

Equally, the business may possess a very large level of stock. The questions to answer are, how valuable is this stock, and is it paid for? It is of no value if the stock is outdated or inappropriate to future sales’ needs.

Everything needs to be in writing. At the meetings to discuss each of the stages of the possible purchase, the buyer should take notes (minutes) of all the discussion and decisions. These should be signed and dated by both parties at the meeting’s conclusion — it is amazing how quickly people forget what they have said or agreed to.

Buying a SME can bring with it some problems unique to such small businesses. You may find there are no formal accounting records at all. It is almost a case of what you see, you buy.

The truth is, you don’t buy under such conditions. These circumstances suggest you have to become a bit of a Sherlock Holmes. This demands you ask yourself: “Why do I want to buy this business? Why not just start-up my own business?”. If the answer is, “I need to buy this business”, then the homework needs to be done and done thoroughly.

The best place to start is with the company’s bank statements. These will give information, not just in respect of revenues, but also in respect of liabilities; for instance, VAT and PAYE payments, personal drawings and cash-flow in general.

The conclusion that such an investigation could lead you to, is: “I won’t buy the company, but perhaps I will buy the right to manufacture/sell the products owned by the company”.

I have witnessed too many businesses failing because the nature, form, structure and price of the original acquisition were blatantly flawed and the new owners truly bought a pig in a poke.

They paid for what they thought they were buying, not what was really being sold to them. They acquired liabilities they had no idea they were becoming responsible for. The business was doomed to fail from the very beginning.

The conclusion: let your preliminary investigations agree on a ballpark acquisition price, then conduct a thorough analysis of all the operating circumstances to confirm or otherwise value the price.

Join the conversation!

24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions.

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Comments have been closed for this article.

Inside News24

 
/News

Book flights

Compare, Book, Fly

Traffic Alerts
There are new stories on the homepage. Click here to see them.
 
English
Afrikaans
isiZulu

Hello 

Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.


Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.

Settings

Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.




Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.