Learn how to investigate a business effectively with this comprehensive guide. Avoid risks and make informed decisions. Start your investigation today.
There are three ways to start your own business: create a company from scratch, launch a franchise or buy an existing business. Building a company is expensive; a franchise has neither a customer base, nor premises, nor employees. If you have few free resources or want to expand your current activities, it is more profitable to buy a ready-made business.
Every successful company has a good idea behind it, but also a strategic execution. When starting, the first thing they usually do is look for the solution to the problem for which they decide to undertake.
Many business managers do not have a complete picture of what is happening in their own production units. They are familiar with the organizational structure, areas of activity, and general economic indicators. If the result turns out to be a profit, then the confidence of success comes. But are there enterprises on the market that remain in a “blind” management mode for a long time?
How To Investigate A Business; You should pay the special attention on the following points.
- CAUSE OF SELLING
Investigator should pay the special attention to know the cause of selling the business by the vendor The cause of selling may be loss of goodwill, low sale volume or any other reason.
- TREND OF BUSINESS
Investigator should pay the special attention to know whether the business is going on the road of prosperity or not For this purpose, he should compare the expenses and incomes of previous years.
- VALUATION OF ASSETS
Investigator should pay the special attention to know whether the assets have been properly valued and depreciation has been provided on these assets
4. VALUATION OF GOODWILL
Investigator should pay the special attention to know the real value of goodwill. Goodwill is an excess of purchase price paid over value of net assets purchased
5. VALUATION OF LIABILITIES
Investigator should pay the special attention to know whether the liabilities have been properly valued and they have not been shown at lower figures.
- condition of machinery
Investigator should pay the special attention to know the condition of machinery whether it is new, old or replaceable.
- WORKING CAPITAL
Investigator should pay the special attention to know whether the working capital is adequate Wording capital means the excess of current assets over current liabilities.
- EXAMINE THE AUDITOR REPORT
If the. accounts have been previously audited then investigator should examine the auditor’s report.
- VOUCHING
Investigator should pay the special attention to know whether the capital and revenue expenditures are properly vouched or not He should also pay the proper attention to deferred revenue expenditures
- COMPETITION OF BUSINESS
Investigator should pay the special attention to know whether there is a much competition of business which is proposed to be taken over.
1L___ Verification OF PROFIT
Investigator should also pay the special attention to know the profit of previous years. The profit must not be inflated by the overvaluation of stock.
12.___ LIQUIDITY RATIO
Investigator can examine the liquidity position with, the help of current ratio ‘md quick ratio I he current ratio must be 2 1 and quick …io may be I I I he high ratios show the strong liquid position
13. SOLVENCY RATIOS
The investigator can check the solvency position of the business with the help of solvency ratios such as
equity ratio, fixed assets ratio and debt service ratio. The sound business shows result of ratios as
Equity Ratio = 60:40
Fixed Assets Ratio = Less than unity
Debts Service Ratio = 4 times.
- NATURE OF BUSINESS
The investigator may check the nature of work. It m<.y be manufacturing, trading or service business.
- REDRAFT STATEMENT
It is also possible that the investigator may determine the different rates of depreciation and provision for bad debts. So he should redraft his report to find out the exact financial position.
- PROVISIONS AND RESERVES
The investigator should check that whether a proper amount is set aside for provisions and reserves. The future losses can be met out of such funds.
- FUTURE PROSPECTS
The investigator should check the future prospects of the business. For this purpose, he should analyses the number of customers and share in market.
- LABOUR STRUCTURE
The investigator should pay the special attention to see the labor structure. The labor structure may be consisted of men, women and boys. The women and children can leave the job without any reason.
- PURCHASE CONSIDERATION
The investigator should note the purchase price offered by the buyer The purchase price may be settled at cost price, market price, higher or lower.
- PRICE PAYMENT
The investigator should see that whether the purchase price will be paid in cash or shares or debentures. It may be paid in lumpsum or installments.
- OLD CUSTOMERS
The investigator can also meet with old customers of the business. The old customers may give suitable information about the product and running of business.
- MA RKET STANDING
The investigator may check the total supply of business in the market If this share is more than 50 percent, it is considered better market standing
- EXTRA ORDINARY ITEMS
The investigator should pay the special attention to know the extra ordinary items appeared in the books of accounts. He should ask the management to explain the position.
- WRITTEN REPORT
The investigator should submit his report to the interested person The report must be in writing. A good report shows that investigator possessed the technical knowledge.
- ADVICE
The investigator may advice to the owners. This advice may be helpful in removing the weaknesses of the business.
By following these steps and strategies, you can investigate a business with confidence and make well-informed decisions. Don’t hesitate to dig deep and ask the tough questions – your due diligence will pay off in the long run. How will you apply these investigative techniques in your next business endeavor?