However, the quantitative analysis reveals that the company's true value is well below the asking price. This is justified by the company's declining profitability, risky financing, low liquidity, and over-utilized resources. Having conducted studies on quantitative issues regarding the financial statements in depth, it is also apparent that the initial cost of funding the anticipated purchase cost of the business in itself will have a substantial impact on the future profitability, liquidity and cash flow. Such financial pressures will occur in addition to other considerations.
Qualitative analysis revealed direct cost issues, need for investment in restoration and showroom facilities, and required improvement in human resources, together with the introduction of modern technological production, administration, marketing and accounting systems.
The prospective owner needs to take into account the need for additional cash outlay which is needed to boost the growth of the company. Consideration has to be given as to how the additional investment required to support these measures is to be funded. Human resources apprehension due to the new ownership should also be considered. In term of the qualitative analysis, on reflection we would recommend certain changes in terms of the employees of the business as there are elements within this which could not only disrupt the day to day operation of the business, but could have an adverse effect upon the business. In addition, more efficient cost management techniques to offset higher direct costs and wages are needed to ensure profitability.
The proposals we make here are threefold. Firstly, that a counter offer of $400,000 is made together with revised together with revised terms in respect of the payment terms and conditions attached. Secondly, that there be a revision of the terms and conditions relating to the agreement with the Venture Capitalists. Third, in the event of the revised sale price not being acceptable to the vendor and that John is prepared to continue on the basis of the original purchase price, that the formula and structure of proposal put forward by Phil will need to be restructured.
Table of Contents
Executive Summary 1
I. Introduction 3
II. Business Valuation 4
Financial Analysis 4
Post Sale 4
Qualitative Analysis 8
III Business Purchase Options
IV. Conclusion 9
The decision of acquiring a business entity requires a thorough evaluation. It is irrefutable that business acquisitions entail a huge amount of risk. As with any investment, a business is associated with the prospect of high returns. However, due to the problem of information asymmetry or imperfect information, it is often difficult to ascertain the intrinsic value of an investment and its future returns. Thus, different valuation principles are used to determine the true value of an investment (Jones and Dyke 1998).
Another important consideration in acquiring a business is the scenario after the transaction. It is essential that the new owner of the business if familiar with the issues currently faced and will be faced by the company he buys. Numbers are not the only factors to take into account during a purchase but the managerial and operation concerns as well. In fact, quantitative analyses should always be accompanied