Key Factor # 1 – Quality of Earnings
Be aware of “add backs” and one-time events. These can greatly change earnings figures and don’t always reflect the company’s actual earning potential. It’s also important to remember that all companies have some level of non-recurring expenses on an annual basis. These expenses can range from the expenditure for a new roof to the write-down of inventory to a lawsuit. So, be sure to watch out for a business appraiser that restructures earnings without any allowances for extraordinary items.
Key Factor # 2 – Sustainability of Earnings After the Acquisition
Take into account the sustainability of the earnings. In other words, will the company continue to grow at the previous rate? This is especially important for buyers who want to ensure that their investment will be a wise one. With this in mind, conducting due diligence and researching the industry and specific company thoroughly is crucial.
Key Factor # 3 – Verification of Information
Make sure that all information is accurate and up-to-date. You also need to make sure that you’re aware of potential product returns or uncollectible receivables. Most importantly, be sure to ask the seller lots of questions to get a clear picture of the company’s financial status. If you’re not careful, you could end up with some nasty surprises down the road.
By understanding what to look out for, you can avoid unpleasant surprises down the road. Two businesses may appear to be very similar on paper, but by taking a closer look at their values, you can reach very different conclusions about their worth. Additionally, be sure to investigate how the businesses are funded and what kind of long-term impact that could have on your earnings. Finally, be mindful of the sustainability and impact of the business before making any decisions.