Diagnose and evaluate the company to be resumed

Verified 19 July 2023 - Legal and Administrative Information Directorate (Prime Minister)

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Next Step: Letter of Intent

Your meeting with the transferor allowed you to gather information about the company and to form a first opinion. Now you're entering the diagnostic and evaluation phase to probe the strengths and weaknesses of the company. You will then be able to formulate your takeover intentions or not to the transferor.

Diagnosis of company involves in-depth review company to identify its strengths and weaknesses.

A clear and detailed knowledge of the company is necessary to establish a realistic, viable and presentable business plan for a financial organization.

The overall diagnosis of the company includes several diagnoses that cover the entire business:

  • Diagnosis of its activity : This involves assessing the opportunities and risks associated with the company's market, identifying competitors and assessing its competitiveness. In practice, this diagnosis alone may prove decisive in the choice of the purchaser of the company.
  • Diagnosis of means : this involves analyzing the real estate, material, facilities, equipment, patents and stocks available to the company to carry out its business. We must also look at the organization of the company: who is responsible for management, production and sales?
  • Human diagnosis : if the company has employees, it is a question of identifying the role and functions of employees within the company and of assessing the risks associated with the departure of the manager. Improvement strategies can be proposed to correct any imbalances in company management. Unemployed companies are not affected by this diagnosis.
  • The financial diagnosis : the financial health and profitability of the company must be assessed. This diagnosis enables the purchaser to encrypt the realistic or unrealistic aspect of the operation.
  • The legal diagnosis : it is necessary to recall the regulations governing the activity in force (operating conditions, standards, labels). It is also necessary to list the contractual obligations of the company (rental, insurance, outstanding credit, etc.). These items will be transferred automatically upon recovery.
  • Quality, safety and environmental diagnostics : This is to ensure that the company complies with environmental (use of chemicals, waste management) and personnel safety regulations.

It is recommended to to be accompanied by professionals to carry out these different diagnoses: accountants to best value all the assets of the company and notaries or lawyers to analyze the legal aspect.

To carry out the diagnosis of the targeted company, the transferor must provide you with the following documents :

This is a business
Legal documents
  • Kbis Extract and/or Siren number : it is easily accessible in the company Directory
  • Statutes of the business : they specify the purpose of the company, the length of the business, the location of the registered office, the allocation of capital, the conditions for the authorization of a new shareholder, etc.
  • Minutes of the last general meeting
  • Commercial lease : it indicates the activities authorized in the premises and the expiry of the lease
  • Miscellaneous Contracts : general conditions of sale, employment contracts, commercial contracts, operating licenses, etc.
Accounting and financial documents
  • Balance Sheets last 3 fiscal years
  • Profit and loss accounts last 3 fiscal years
  • Accounting Annexes last 3 fiscal years
  • Detailed turnover analysis
  • Bank Account Statements company
  • Timelines : payment of suppliers and social security contributions
  • Hardware Status : acquisition dates, depreciation schedule
Individual business This is a
Legal documents
  • Extract K and/or Siren number : it is easily accessible in the company Directory
  • Commercial lease : it indicates the activities authorized in the premises and the expiry of the lease
  • Miscellaneous Contracts : general conditions of sale, employment contracts, commercial contracts, operating licenses, etc.
Accounting and financial documents
  • Balance Sheets last 3 fiscal years
  • Profit and loss accounts last 3 fiscal years
  • Accounting Annexes last 3 fiscal years
  • Detailed turnover analysis
  • Bank Account Statements company
  • Timelines : payment of suppliers and social security contributions
  • Hardware Status : acquisition dates, depreciation schedule

Valuation does not allow the exact transfer price to be fixed, but rather to obtain orders of magnitude that will guide the negotiations.

As with any transaction, the transfer price of the company follows the law of supply and demand. A company coveted by multiple buyers will attract higher purchase offers.

The estimate of the financial value of the company takes into account multiple criteria :

  • Current and past revenue (last 3-5 fiscal years)
  • Financial structure
  • Customer Portfolio
  • State of the market and competition
  • Reputation of the company
  • Company know-how
  • Material and equipment

It exists multiple methods company valuation. It is important to combine each of these methods to obtain a valuation as close as possible to the real value.

Heritage method

The heritage method is to evaluate the accounting net assets of the company, i.e. the difference between its assets (assets) and its liabilities (debts).

This calculation is based on the analysis of the accounting balances for the last 3 financial years.

Please note

This method alone does not provide a fair financial value for the company. It does not take into account the profitability and development potential of the company.

Comparative method

The comparative method consists of compare the company to other similar companies (activity, size, and maturity level) to apply a scale depending on market prices.

This method does not take into account the value of the commercial lease and significant price differences can be observed.

Profitability method

The profitability method is to estimate future capacity the company to make a profit.

The resulting value should then be weighted taking into account the risk of not achieving the predictions. The estimate should cover a period of no more than 7 years to reduce the margin of error.

Please note

This method assumes that the company's profitability will increase over the next few years. In practice, this performance is rarely seen.

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