Diagnose and value the company to be resumed
Verified 26 September 2023 - Directorate for Legal and Administrative Information (Prime Minister)
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 recovery 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 since its inception.
A clear and detailed knowledge of the company is necessary to draw up a business plan realistic, viable and presentable to a financial organization (e.g. a bank). A strategic diagnosis includes a internal diagnosis and one external diagnosis company.
The internal diagnosis of company
Internal diagnosis consists of analyze resources and skills company. The aim is to optimize their management and determine an appropriate strategy.
The internal analysis is based on the following points:
- Diagnosis of means : the buyer must analyze the material resources (real estate, material, facilities, equipment, stocks) available to the company to carry out its activity. The purchaser also studies intangible assets such as patents, licenses and the company’s brand image.
- Human diagnosis : the purchaser must identify the employees within the company, their skills, their know-how and their knowledge of products and customers. It must also assess the risks associated with the departure of the leader. Improvement strategies can be proposed to correct any imbalances in company management. Companies without human resources are not affected by this diagnosis.
- The financial diagnosis : The buyer must assess the financial health and profitability of the company. It analyzes its cash flow, financing capacity and equity. This diagnosis enables the purchaser to encrypt the realistic or unrealistic aspect of the operation.
The external diagnosis of company
External diagnosis is analyze the environment company to identify the key factors for its development.
In order to carry out an outside diagnosis strategically, the purchaser must study the macro-environment and the micro-environment of the company.
Analysis of the macro-environment allows to identify the factors affecting the organization of the company in order to adjust its strategic orientations. In general, it is recommended that you use the “ PESTEL , which focuses on:
- Politics : policy decisions taken by governments (subsidies, market regularization)
- Economic : factors affecting purchasing power and consumer behavior (interest rates, economic crisis, etc.)
- Sociological : social characteristics influencing purchasing power
- Technological : innovations that can reduce costs, improve production, bring new products or technologies to the sector
- Environmental : environmental factors influencing the exercise of the activity (use of chemicals, waste management, staff safety).
- Legal : laws and regulations at national and European level affecting the legal framework in which the company operates (operating conditions, taxation, labeling). It is also necessary to list the company's contractual obligations (insurance, bank borrowing, ongoing leasing, etc.).
In parallel, the analysis of the micro-environment is to assess the opportunities and risks associated with the marketplace in which the company operates. This competitive analysis allows you toidentify all external threats which the company must face.
The purchaser shall consider the following:
- Thecompetitive intensity : number of competitors, growth of the business sector, company share
- The new market entrants : the threat of new competitors appearing on the market
- The client bargaining power : the company is less risky if it has a diversified customer base
- The bargaining power of suppliers : supplier influence is enhanced if their products are difficult to replace
- The substitute products : when an innovation makes the company's offer less attractive or relevant
- Theinfluence of the state : the State has the possibility of regulating a market and limiting the number of players in a sector of activity (e.g. energy sector).
In practice, the analysis of the micro-environment can be decisive in the choice of the buyer of the company.
Please note
It is recommended to be accompanied by professionals to carry out these various diagnoses: accountants to make the best use of all the assets of the company and notaries or lawyers to analyze the legal aspect.
The “SWOT” synthesis
The internal and external diagnostics provide a wealth of data on the company targeted by the recovery project.
In order to develop a relevant recovery strategy, the buyer must make this data readable and usable. To do this, it can use the method ‘ SWOT ” (Strengths, Weaknesses, Opportunities, Threats) or in French: strengths, weaknesses, opportunities and threats.
This process allows you to schematize in a simple way the information revealed by the various diagnoses.
Opportunities | Threats / Risks | |
|---|---|---|
External analysis (at market level) |
|
|
Strengths | Weaknesses | |
|---|---|---|
Internal analysis (company level) |
|
|
To carry out the internal and external diagnoses of the target 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 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 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 consists of to assess the market value of the company. This value will be the basis for negotiating the sale price between the transferor and the buyer.
Valuation, on the other hand, does not determine the exact transfer price, but rather provides 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 several points:
- 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 discrepancies can be noted.
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.
Who can help me?
The public service accompanying companies
Do you have a project, a difficulty, a question of daily life?
Simple and free - you will be called back within 5 days by THE advisor who can help you.