INDICATORS TO TAKE DECISION ON THE PURCHASE / TAKE OVER OF THE BUSINESS COMPANY

By: V S RANGARAJAN Posted on: 2008-03-25 ** Print Article ** ** Copy Article ** - Category Feed

Article Summary: The company to be successful must perform efficiently in all the functional departments viz Production, Marketing, Finance and Human Resource Development. Like individuals go for regular medical check up to rectify the health problems at the appropriate time to avoid post mortem happenings business units should also undergo audit check up to rectify mal functioning of units without delaying before

I) Introduction

The company to be successful must perform efficiently in all the functional departments viz Production, Marketing, Finance and Human Resource Development. Like individuals go for regular medical check up to rectify the health problems at the appropriate time to avoid post mortem happenings business units should also undergo audit check up to rectify mal functioning of units without delaying before it becomes too late for rectification.

The investors in business before they consider investing would like to know the health of the business company

Business units are sold for many reasons by the existing management like Scarcity in the management personnel to run the business profitably, want of working capital funds, decline in demand for the product due to competition, etc. The business investors may consider buying such business projects in case they find it suitable for them based on their strengths

To know the health of the business company which is under consideration for buying by the investors adopt the strategy of finding out the signals of the performance indicators of the business for sale ultimately to take appropriate decision on purchase proposition

Some of the performance indicators to know the health of the company before buying the business proposal are given below by the author of this article which may be useful to the buyers / investors of business company

The author suggests the investor / buyer of the business company to conduct Trend analysis on the following indicators and he also suggests the buyer to do comparison analysis with the industry / other players of the industry to arrive more accurate findings / decision

II) Performance indicators of the running business.

1) Trend on the credentials obtained

The credentials obtained by the business company from reputed organizations, Government, major customers, etc for the company's remarkable performance ensures efficient functioning of the business company

2) Trend on the certification obtained like ISO, BP / IP, ISI, etc

The certificates obtained by the company from well known certifying agencies on the functioning of the company. Possession of these certificates by the business company will help the company to market its production easily

3) Trend on the society benefit projects undertaken

The more the number of society benefit projects undertaken by the company indirectly conveys the message to the society / public that the company is also interested in the society welfare also during its functioning and which would have boosted the image of the company

4) Trend on the Attrition rate of the Directors on the Board of Directors of the business company

If the directors of the business company had resigned prior to their contract period in the earlier occasions it could be concluded that there are problems within the management of the company creating bad image in the minds of bankers, financial institutions, investors and others and which may affect the functioning of the business company in the future

5) Trend on the Attrition rate of the Key personnel of the functional departments of the business company

If the key personnel of the business company had resigned prior to their contract period in the earlier occasions it could be concluded that the key personnel of the business company were not treated properly by the management of the company and may result in bottleneck of its functioning

6) Trend on the Net worth of the business company

Net worth is the Assets minus Liabilities. If the Net worth of the company is increasing it could be concluded that the company's management has been confident on its future successful functioning and hence opted for reinvestment of the reserves and surplus of the company towards modernization, expansion and diversification program.

But care should be taken that the Balance sheet of the company is re-valued by a reliable, dependable and know gable Asset values every year

7) Trend on the Profitability of the company in terms of Profit on sales and Profit on investment

If Profit on Sales shows increasing trend then it could be concluded that the company's product selling price is increasing and this confirms that the there is good demand for the product. Also this trend analysis helps the company to compare its performance to its competitors in the industry

If Profit on investment shows increasing trend then it could be concluded that the company was doing well in the past. The trend should be compared to the other available investment opportunities and investment on this business is providing more rate of return than others it is advisable to purchase the business

8) Trend on the Share value of the company

If the trend of the Share value of the company increases it could be concluded that the investors community is having confidence on the functioning of the company which will help the company to mobilize funds in the future whenever required for its working capital funds or for expansion programs

9) Trend on the Sales Turn over of the company

If the trend of the Sales Turn over of the company increases it could be concluded that the company's Market size is growing (or) Consumption rate is increasing ( or ) both

If the increase in Sales Turn over achieved is due to increased Selling price then it could be further concluded that the customers are willing to buy the company’s product even when the price of the product is increased in the market

10) Trend on the Selling Price of the product of the company

If the Selling price trend is increasing then it could be concluded that the demand of the product increases

11) Trend on the Margin of Profit / Product wise

If the trend of the Margin of Profit is increasing it could be concluded that the demand for the company's product is on the increase

12) Trend on the Bad debts suffered over the past of the company

If the trend of the annual Bad debts account increases it could be concluded that the company is finding problem in marketing its production and this situation would have resulted in the company selling its production to unreliable distributors

13) Trend on the Credit Sales on the total sales

If the Credit sales trend is increasing it is indication that the demand for the product is declining

14) Trend on the Debt Equity ratio based on the Balance sheet of the company

If the trend of the Debt Equity ratio of the company is decreasing along with increasing cash accrual situation is a positive sign and it could be concluded that the investors of the company do not show interest to borrow funds from the financial institutions or banks

15) Trend on the Debt Service coverage ratio based on the Balance sheet of the company

If the trend of the annual Debt service coverage ratio increases with the increase in the debts it could be concluded that the profitability of the company increases

16) Trend on the Break even point prepared on the Balance sheet of the company

If the Break even point of the company decreases every year then it could be concluded that the company is performing well

17) Trend on the number of Product lines / Product mix

If the trend in the number of Product lines and Product verities increases every year then it could be concluded that the Research and Development activities of the company has been functioning efficiently. But on the other hand too many products produced by the company indicates that the company has not specialized in any particular line and has not standardized its product range which becomes its weakness

18) Trend on the Market share of the company on the overall sales of the industry

The percentage of sales of the company on the total sales of the product of the industry is Market share

If the trend of the industry sales is increasing it could be concluded that the demand for the product is increasing. If the trend of the company sales is increasing it could be concluded that the demand for the brand of the product is increasing

19) Trend on the Export sales compared to the previous years

If the Export sales trend is positive it could be concluded that the company is maintaining superior quality of the product to cater to the export market

20) Trend on the Export sales compared to the total exports of the industry

If the trend of the Export sales of the company is increasing on the total exports of the company indicates that the company's product is preferred by the export market than its competitors

21) Trend on the number of countries importing company’s product

If the trend on the number of countries importing company's product has increased considerably then it could be concluded that the company's product preference in foreign countries is increasing

Similarly the increasing trend in sales to other sectors like Government sector, Industrial market sector, Consumer market sector, institutional market sector will reveal the fact that the company is maintaining quality of the product and also maintains competitive price and hence was able to retain its position

22) Trend on the number of distributors / marketing middlemen to distribute the product

If the trend on the number of distributors increases it could be concluded that the company's product is being preferred by the marketing middlemen in the industry

23) Trend on the Distributors / Marketing middlemen loyalty / Customer’s loyalty to the company

If the distributors continue to remain in the company for longer period then it could be concluded that the company is functioning efficiently

24) Trend on the Market expansion programs undertaken

If the trend of the company's expansion programs undertaken are successful in the past it could be concluded that the company is capable of implementing new programs

25) Trend on the Product expansion programs undertaken

If the trend of the company's Product expansion programs undertaken are successful in the past it could be concluded that Research and Development of the company is capable of developing and launching new products in the market

26) Trend on the Integration programs undertaken

If the trend of the company's integration programs undertaken are successful in the past it could be concluded that the Business strategy division of the company is capable of managing diversified projects

27) Trend on the Diversification programs undertaken

If the trend of the company's diversification programs undertaken are successful in the past it could be concluded that the marketing different products to the different customers indicates that the company is having strengths like personnel, infrastructure, image, etc to cater to diversification programs

28) Trend on the payments to the employees, auditors, other service providers

If the trend of the business company is prompt in paying the salary and service c
29) Trend on the customer complaints over the past

If the trend on the number of customer complaints increases it will be concluded that the company is unable to maintain the Customer satisfaction level may be due to the poor quality of the product and services provided by the company

30) Trend on the Installed capacity of the Plant of the company

If there is increasing trend in the installed capacity of the plant of the company, it could be concluded that the company is confident on the industry and hence invested on the manufacturing facility of the company

Investing on Plant and machinery indicates the high level of confidence level that the company is having on the industry otherwise it would have opted for out sourcing of product for marketing

31) Trend on the Capacity Utilization of the Plant of the company

If the trend on the capacity utilization is on the increase it could be concluded that the unit is well stabilized in every respect overcoming the initial teething problem business normally occurs

32) Trend on the loss in capacity utilization ( loss in CU due to labor strike, want of labor, raw material shortage, etc )

If the trend on the loss in capacity utilization is on the decrease or consistent it could be concluded that the unit is being managed efficiently and hence will be easy to take over the management of business company

33) Trend on the Out put / Production of the plant of the company

If the trend on the Production is on the increase or consistent it could be concluded that the unit is not facing any shortage of inputs required for production

34) Trend on the Raw material realization of the plant of the company

If the trend on the raw material realization is increasing or consistent then it could be concluded that the company is having reliable suppliers of the raw material

The realization aspect need to be compared with the industry standards using the same technology and in case the realization is better than the industry standards then it could be concluded that the technology chosen by the business company is superior than the competitors

35) Trend on the Energy consumption per unit produced

If the trend on the Energy consumption per unit is decreasing or consistent then it could be concluded that the unit is efficient in Energy audit function

36) Trend on the Cost of Production per unit produced

If the trend on the Cost of Production per unit increases more than the rate of increase in Selling price this indicates that the company is losing its margin of profit due to unviable operations

37) Trend on the Rejects / Waste reprocessed / Seconds sales, etc

If the trend on the rejects is increasing then it could be concluded that the production inputs are deteriorating and the time has come to renovate / modernise / maintain the machines which may be the cause for rejects and will involve major out flow of funds from the business company

38) Trend on the Machine productivity

If the Trend of the machine productivity is decreasing then it could be concluded that the company's machines have become old and obsolete which may need total replacement which may involve huge investments and production

39) Trend on the Labor productivity

If the trend of the labor productivity is decreasing then it could be concluded that the company's labors have become old and they have to be replaced with new skilled workers which may result in increase in fixed cost of the business company

40) Trend on the Supplier loyalty and rejects made

If the trend on the number of suppliers increases along with the existing suppliers it could be concluded that the company Material planning management is efferent. On the other hand if the business company had changed the suppliers frequently it could be concluded that business company was not efficient in identifying and retaining suppliers with them

It will become difficult for the new management to convince the suppliers that the problems faced during the previous management would not arise in dealing with the new management

41) The future plans and its feasibility

If the company has already made certain plans for expansion / diversification / integration and has made considerable progress in the right direction will provide indication that the new management can take over from the point left by the previous management and complete the same easily

42) Trend in the annual Average Stock level of the Finished Goods in the factory

If the proposition of the Finished goods stock position and the Production of the
company is consistent all the time then it is obvious that the unit is not having Marketing problem

43) Trend in the adhering to statutory obligations like Licenses, permissions ,etc

If the business company is maintaining and operating with the necessary required valid licenses / permissions from the Government authorities or other relevant authorities it will be easy for the new management to proceed take over without much hurdles

44) Trend in the promptness of the Repayment of loan to the financial institutions / banks / suppliers

If the company is prompt in repayment of loan to its lenders it could be concluded that the company is maintaining financial discipline and possess good image in the minds of the lenders of the company who in turn will provide support to the company for future requirements of the company

45) Trend in the number of legal court cases pending against the company

If there are many cases pending against the company in the court of law it is advisable for the company not to consider the purchase of the company because the cases may hinder the functioning of the company

46) Concessions available from Government, Bankers and other lenders for take over by new management

The concessions available given by the lenders ( bankers giving waiver of penal interest on one time settlement of repayment of entire loan ), tax concessions given by Government, etc has to be considered by the management while buying the business company

47) Cleanliness and Physical appearance of the premises

If the Premise of the business company is neatly maintained with cleanliness it indirectly conveys that the management has been very effective and will be easy for the new management to take over

III) Conclusion

The indications mentioned are discussed based on the data available with the existing units on the past performance ( ie ) based on second data available with the company

To reconfirm on the findings of the signals obtained from the indicators mentioned in the above paragraphs it is possible to conduct Primary survey and with the findings thus obtained could be compared with the Trend analysis findings

The company can contact the Lenders to know about the company’s financial discipline, with the Customers to know about the quality of the product and the service provided by them, with the Government officials on the company adhering to the statutory regulations, payment of salary to the employees and the service providers like auditors, advocates and others

It is advisable for the investors to compare the company’s performance with the industry standards of the local environment

Article Source: http://www.upublish.info

About the Author:
V S RANGARAJAN
EDUCATIONAL QUALIFICATION B TECH, MBA, M PHIL, ( P HD ) EXPERIENCE INDUSTRIAL CONSULTANCY 18 YEARS INDUSTRY 3 years TEACHING 5 years

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