Due diligence a key concern

YOU would think the man who, until recently, ran the Western Australian division of major accounting lobby group CPA Australia would have a walk-up start when it came to buying a small business. But as former CPA Australia WA director Ian Watt told WA Business News, this was far from the case. It has been a process that has evaluated about 50 different businesses over a period of many months. Mr Watt’s journey has run the full gamut of excitement, fear and discovery that involves a near million dollar investment; and it is still not over. Due diligence completion, something Mr Watt is now convinced is the key to the successful acquisition of any business, is still some weeks away. The deal could fall over if there is any hitch in that process. And that, Mr Watt says, is the way it should be. Mr Watt has been with the CPA for more than eight years, the last 30 months as its director, with some time off in between running his own marketing and management consultancy. He is single and has a desire for a new challenge, to try something completely different. “I want the ultimate satisfaction of running a successful business, to make it grow, maybe take it interstate and overseas, into new production and markets,” Mr Watt said. The search began via a mixture of professional business brokers and personal and professional contacts in the accounting and wider corporate sectors. Mr Watt did not have a particular business or industry sector in mind: “But after a while you get a feeling for what’s going to work in the current economic climate and the search narrows”. He looked at businesses relating to an ageing population, mobile travel (caravans etc), lifestyle and leisure, renewable energy, environmentally friendly construction and distribution. “The decision needs to include the level of commitment you are prepared to give, whether it will be an investment managed by someone else or you are going to be hands on,” Mr Watt said. “I believe you have to be there and put in the controls and systems that work for you and the business. A manager will never run a business the way the owner will. It’s not his money.” The business reports he has seen have ranged from a few emailed lines with profit figures and projections to detailed reports from professionals skilled in selling businesses. “At the professional end, the process is pretty sensible. The brokers have the view that today’s buyer will be tomorrow’s vendor and there will be more business down the track if the job is done right,” Mr Watt said. An initial discovery was how badly some businesses appeared to be run, many without fundamental business practices, such as budgets, cash flow forecasts, stock control, staff incentives and marketing. But Mr Watt’s ultimate lesson has been the critical need for good due diligence – the evaluation and verification of every aspect of the business’ operations and its future sustainability. “The key is getting the valuation right. There are a number of accountancy practices that are particularly skilled in the due diligence field. They know exactly what to look for, the questions to ask and usually have a pretty good idea about the business in the first few hours,” he said. A good aspect is that, during the whole process, there is plenty of time to bale out. “Putting in the offer is just the first stage. It’s not like buying a house and the process is stacked in the buyer’s favour. You are not doing due diligence to catch someone out, but to verify the business.” That said, people obviously clean up their businesses to sell them, he said. “When buying any business, you are buying results and facts, not the future. You are actually buying what has happened. The failed dot.com boom was all about buying the future,” Mr Watt said. The business is going to cost around $1 million, and for that he will spend about $5,000 on due diligence. “I started the process on this business six weeks ago and it could take another couple of weeks before the final decision,” he said. Because of this, Mr Watt is keeping the business under wraps. It is a WA manufacturing business that employs up to eight people and has been trading successfully for 14 years. He also has a potential partner in the wings. “In the end, I’m investing in myself. I had to ask that given my background, skills, capital and resources, is this the best investment I can make. That’s why you need all the information you can get,” Mr Watt said.