8 Essential indicators for use in buying and selling businesses

1
4495
financial area - valuation
Excel Spreadsheets

In this article we will talk about:

What to Know When Buying and Selling a Business

When you are in the process of buying and sale of companies, you need to think about the debts that this company has, how many employees it has, if there is any ongoing process against it and with which long-term obligations and contracts it is compromised.

8 Essential indicators for use in buying and selling 1 companies

Now, if your concern is to sell a company, you need to think about all those items that a potential buyer may question you, in addition to finding

In any case, it will be essential to know the financial information that will help you avoid bad decisions, pay more, or receive less than you should in a business buying and selling business. You need to be in control and this only happens when you know your key indicators.

Essential indicators of economic and financial evaluation

To help you in this process I have decided to list 8 indicators that I will explain a bit more and tell you how they will help you in buying and selling businesses. See the list and if you want to see a specific indicator directly, just click on it in the same list you will be automatically directed to this part of the text:

So here we go:

Net Margin

It is the indicator that shows the company's ability to make a profit compared to the net revenue it has earned over a given period.

balance sheet indicators - net margin

  • Formula:

Net Margin = Net Income / Revenue

  • How will you help in buying and selling businesses?

Look for companies that have a high net margin, as this will indicate that your operation is profitable, facilitating your transition and adaptation work. In the case of selling a company, seek to show to buyers how much your company has net margin and how this can help them after the acquisition.

Current liquidity

Current liquidity shows whether the organization has or will have sufficient financial resources to honor its short-term commitments (up to one year).

balance sheet indicators - negative current liquidity

  • Formula:

Current Liquidity = Current Assets / Current Liabilities

  • How will you help in buying and selling businesses?

This item is critical when you are buying a business, as this indicator can mean an even greater need for capital. I say this, because in addition to the amount paid to the company, you will have to deal with that short-term liabilities greater than the short-term assets. If you are selling a business, be very transparent with your buyers, so they are fully aware of the values ​​involved and this does not generate future problems for you.

Asset Turnover

The asset turnover relates the total sales to the total assets of the company, showing exactly how efficient the company was when using its assets.

balance sheet indicators - asset turnover

  • Formula:

Turnover = Net Revenue / Total Assets

  • How will you help in buying and selling businesses?

When it comes to buying a business, especially industries and businesses that have a large amount of assets, this is going to be one of the most important things for you to evaluate, after all, if sales are not enough, it may not make sense to invest in so many assets. In the case of sales, make sure you are leveraging your assets to the fullest and your buyers will have a good view of the business.

Impairment of Shareholders' Equity

This indicator shows the percentage of shareholders' equity that is applied to permanent assets, that is, the greater the investment in the AP, the less resources left to pay the current assets.

balance sheet indicators - depreciation of shareholders' equity

  • Formula:

Immobilization of Shareholders 'Equity = Permanent Assets / Shareholders' Equity

  • How will you help in buying and selling businesses?

Beware of businesses where equity is immobilized as this increases your dependence on these items. In the case of selling your business, this can be a factor that increases the bargaining power of your buyer.

Indebtedness

The debt indicator shows whether a company is heavily indebted or not, by comparing its net worth against short- and long-term liabilities.

balance sheet indicators - indebtedness

  • Formula:

Indebtedness = (Current Liabilities + Long-Term Liabilities) / Shareholders' Equity

  • How will you help in buying and selling businesses?

You do not need to be the best financial manager to understand that when buying and selling companies, debt will play a crucial role in the final value of the business. If you are going to buy a business with a lot of debt, be prepared to pay for it in the near future, and if you sell it, know that it devalues ​​your final price.

Net Present Value (NPV)

Net Present Value (NPV) is a mathematical-financial formula used to calculate the present value of a series of future payments discounting a stipulated cost of capital cost.

net present value

  • Formula:

VPL = FC1 + (FC2 / (1 + i) ^ j + 1) + (FC3 / (1 + i) ^ j + 2)

  • How will you help in buying and selling businesses?

If you are thinking of acquiring a business, you can simulate how much future cash flow it will generate (based on past flows and growth rates) to understand your NPV, from that calculation, see if it makes sense to put your money in a new business or if it is better to look for other alternatives. If you are selling, it will play the same role, to show you how much your business could generate in the future. An offer lower than that may not be advantageous, depending on your interest.

Internal Rate of Return (IRR)

Basically the IRR is used to calculate the discount rate that a given flow would have to match its NPV to 0 (zero).

economic viability indicators - vpl x discount rate

  • Formula:

TIR = Σ Fn / (1 + i)

  • How will you help in buying and selling businesses?

It has the same role of NPV to show you whether it is worth investing that capital or not, but here the comparison is with interest rates, financing or market inflation.

Payback

Payback is the viability indicator that shows how long it takes for your cumulative profit to equal the investment you made first.

economic viability indicators - payback

  • Formula:

Net Margin = Net Income / Revenue

  • How will you help in buying and selling businesses?

The idea here is very simple, if you want to have the return over some stipulated period of time, you can make the same projections of future cash flow that we talked about in the last two indicators and compare the payback time with your expectation of return. In case of selling your company, it can be an argument during the negotiation.

valuation

Spreadsheets for use when buying and selling businesses

As you've noticed, there are several indicators that can be used during the process of buying and selling businesses. The biggest problem is to arrive at these indicators with reliable values. To facilitate this process and give you more certainty, a good solution is the use of spreadsheets such as Financial Economic Evaluation or that of Valuation.

Excel Spreadsheets

LEAVE AN ANSWER

Please, write your comment
Please enter your name