Step 2 – Invest Only If The Numbers Make Sense
In my previous blog, I shared step 1 of my suggested three step approach to investing in a business-which dealt with the key questions in assessing the business opportunity. (If you missed it, click here: https://www.sunadvisory.co.za/step1-invest-only-if-the-business-make-sense/).
This month, I delve further into Step 2, which involves assessing the financial performance of the business.
Once the nature of the business and underlying business model has been assessed, the next step is to understand the level of financial performance the business has delivered for its current owners. Really successful businesses generate enough profit to provide for salaries for all employees and management as well as a reasonable dividend to the shareholders.
Over the years I have been approached by many clients who are considering investing in a business that requires working capital funding to meet operational expenditure. The risk of loss is significantly greater when a business has not reached breakeven and any investor needs to be sure how additional funding will result in greater revenue otherwise the business will require a further injection of funding in the future.
Here are the key financial questions you need to be asking:
- Does the business make a profit or a loss and has the business been growing?
- Are all relevant expenses related to the business included in the financial statements?
- How reliable are the projections in light of the historical performance?
- How have the existing shareholders been rewarded?
- Does the business generate sufficient cashflow to meets its commitments?
- What assets does the business own and what is the liability position of the business?
- What is the valuation of the business based on profitability and financial position?
- What are the future exit options and shareholder return expectations?
These are some of the main questions to be answered to determine the financial attractiveness of the business investment.
The next blog in the Invest in a Business series will cover insights on assessing the financial and business risks related to the business investment and how to protect yourself from theses risks. Sun Advisory can assist an investor in assessing the financial performance of the business and future projections. Contact us to discuss your requirements.