When considering a business acquisition in Alberta, several options can be used for evaluation. The type of business and transaction typically determines the valuation method to use. The primary hurdle in acquisition negotiations is the bargaining to reach an agreeable price.
Haggling is a complex process that involves studying the financial information, supplier and customer base, sales trends and more. Most potential buyers of companies hire professional evaluators whose expertise could uncover any hidden issues and set a basis for negotiations.
Gathering business information
After signing an engagement letter, the evaluator can get access to the information and financial documents necessary to prepare the report. The following documents are typically studied:
- Financial statements dating back up to five years
- The most recent tax return
- One-time, discretionary and nonrecurring expenses
- Compensation for management
- Employee numbers
- Business location
- Documents related to rental status or ownership of the facilities, including square footage
- Shareholders agreements and bylaws or patents
When more detailed reports are required, the following might be included:
- Records of the most recent three to five years’ breakdowns of sales by customer
- Determination of customer concentration
- Determination of supplier concentration
- Margins of products by service line
For a collaborative approach to understanding the business, the evaluator may decide on an on-site visit, at which time clarifying questions may be posed. For a more detailed report, research of market conditions, risk factors and business trends may be done.
Once potential business purchasers have such detailed reports, they can determine whether further studies are required before final negotiations can commence. However, this is a complex process typically done with the support and guidance of a legal advisor.