If you have purchased the shares of the company and hence the corporate entity is remaining as part of the business you get the credit rating of that corporation. Any D&B (Dunn & Bradstreet) credit ratings are carried with the business that you are acquiring. It is definitely worth checking out the credit ratings of the company during your due diligence exercise.
In theory, if you purchase the shares of a company you get all the cash that is in any of the company bank accounts at the time you close. Usually when the shares of a business are acquired the bank accounts have a zero balance at the time of closing. The fact that bank accounts will most likely be at zero when you take over the business must be factored into your cash flow budgets.
Know what financiers look for. Besides management and the on-going profitability of the business a financier will look at business ratios. There are many kinds of ratios and not all ratios apply or are valid to all businesses.
Financial Ratios:
Financial ratios should be utilized when first looking at a business to determine whether or not it meets or exceeds your financial goals and during due diligence to verify that the business is sound and that the financial pattern has not changed dramatically over the last three years.
Checking financial ratios over the past few years is a relatively easy way to identify major changes in the company’s expenses and overall financial structure. You should be able to do comparisons by fiscal quarters over the past three years. If a business is seasonal make sure your comparisons are for equivalent periods. As an example, the ratios of a retailer who does a major portion of his business at Christmas will not look rational if you compare January through March to October through December. In that case you would want to compare the same periods of time for different years.
Ratios:
Financiers utilize ratios when qualifying your business for term or revolving loans and/or lines of credit.
There are numerous ratios and not all apply to all business types.
Liquidity Ratios:
These ratios measure the company’s ability to pay its bills (debts) on time.
Current Ratio: The ratio between current assets and current liabilities.
Current Assets
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Current Liabilities
What to look for: A ratio above 1:1 is considered good and 2:1 is considered excellent.
Be aware that current assets usually include receivables and inventory. Make sure that the current receivables are truly current, that usually means receivables that are not older than 90 days and are not in dispute. It is also important to verify that the inventory does not include a lot of items that are not moving or have been mentally written off. Small to midsize companies have a tendency to keep their entire inventory and never write anything off (the “we will need it someday” mentality).
Quick Ratio: The ratio between all assets (excluding inventory) that are quickly convertible into cash and current liabilities.
Cash (CD’s, bonds, etc.) + Current Receivable
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Current Liabilities
What to look for: A ratio of 1:1 is good anything above that is excellent.
This ratio removes inventory from the calculation of whether or not you can pay your bills without selling any inventory. For this ratio to have meaning you must ensure that current receivables are good (truly collectable).
This ratio is popular with financiers as it provides an indication of your ability to pay your bills should an unforeseen event occur. The higher the ratio the lower the financiers risk.