Are you buying a business in Spain? Watch out for those red flags!
If you are one of the hundreds of ex-pats looking to buy a business in Spain- the timing couldn’t be better. There are hotels for sale, estate agencies for sale, bars for sale and even farms for sale in Spain right now. Some of these are genuine deals with the owners selling for all the right reasons.
Don’t get dragged into the usual mistakes however of falling in love with a business, meeting the owner and doing a deal over a beer on the beach. It’s as simple as this; If you don’t do your due diligence, you might make a purchasing mistake.
The seller, perhaps a nice person, might try to leave out details or fudge numbers to hook you. You cannot continue without verifying the details you receive. We advise you to start searching for more information or otherwise you might buy a business that isn’t a good financial investment. We know, we’ve been caught before in a promotional products company deal Ireland. Due Diligence would have saved me almost 60,000 euro!
Making a bad investment can cause you to lose money. The business might need a major overhaul. Or, as in my case, you might inherit an unknown debt. My new partner had not paid tax in four years and my money was immediately taken from our joint account to pay for this. End of partnership, end of my investment.
Our tip is this: Conduct due diligence so that you don’t get stuck with a business in Spain that has no future.
What is due diligence?
Due diligence is the investigation into the business you are interested in buying in Spain. You (or your law office in Spain) will conduct your due diligence before the transaction is finalised to decide whether or not the acquisition is worth it.
When conducting due diligence, now, after our negative experience, we look at key issues of the business. These factors include; profits, financial risks, legal issues, and yes …. Whether or not the seller has paid their tax for the last four years!!
How to do due diligence
Small business due diligence can be a long, complicated process, especially here in Spain. It will involve digging through a company’s records, checking the references, and searching for items the business might have hidden. In my case, my seller knew the money would be taken away from us. Had I spoken to his ex-accountant, I’d have known too. I wanted the deal to work, so I went too fast.
More advice; Don’t conduct business due diligence alone. We would no longer buy a business without having our lawyer or accountant look into it. You might upset your seller but really if she has nothing to hide, then why would she care. In fact, she should respect the fact that you are professional enough to take these steps.
Financial due diligence
Financial due diligence, also called accounting due diligence, is the best place to start, by looking at the economic situation of the business. Your accountant or lawyer will look for consistency among accounts, assets, and liabilities. They’ll also look at historical trends, financial projections, and tax risks. Accountancy is different in Spain than the UK- You can still find these relevant numbers, you just need to dig a little more. Your accountant will help find:
- Income statements. (Profit and loss accounts are not so common in Spain, incredibly)
- Balance sheets. (I’d say half the firms in Spain don’t have one).
- Cash flow. (not bank statements as many Spanish accountants will try to tell you is sufficient).
You’ll want to know:
What is the GP on all services and products?
How much money is owed to or by the firm?
What is the rate of return per service/product?
How much inventory is on hand?
What is the real estate worth? (including fixtures, fittings, equipment etc)
How do past projections compare to current reality?
Are there any more shareholders or investors?
Ask for all the businesses tax details- Oh how I wish I had done that back in 2015.
Legal due diligence
Legal due diligence in Spain when buying a business here means; looking at legal contracts and documents to search for hidden risks and lawsuits.
- Your Spanish lawyer will want to examine copies of contracts, including:
- Leases- premises, cars, equipment.
- Purchase agreements
- Distribution agreements
- Documentation to incorporate the company. (in the case of an SL)
- Sales contracts and sales mandates.
- Employee contracts.
- Agent, collaborator and contractor agreements
- Trademarks, copyrights and patents
Operational due diligence
Here you’ll investigate the actual operations of the business; Items such as the business model, the market, and competition. This varies from business to business, but this is generally the checklist needed.
- Compare the numbers of first-time buyers to repeat customers.
- Determine the peak purchasing times.
- What are the popular items or services?
- Learn what are the popular price points.
- What is the closing rate? In real estate, it may be one closed deal per 100 leads.
- Study the business’s marketing.
- What are the past and current marketing tactics?
- How well did the most recent promotions do compared to past campaigns?
- Are there any trends?
- What is the ROI on marketing? Using the above example, of one closed deal per 100 leads- How much can you afford to pay per lead?
- What were the most successful past marketing efforts?
- Conduct market analysis.
- You need to research the demographics of the surrounding area.
- Who are the business’s target customers?
- What does the geographic economic outlook tell you?
- Who are the business’s competitors?
- Have new competitors entered the market? This can be good (there is a potential business there) and bad. (you have more competition)
- Find out how people perceive the business.
- What do customers, agents, potential customers, suppliers, and lenders think about the business? How do you find out? Call them! (Yes, I wish I had!)
- Research industry trends.
- Is the business’s industry growing or slowing?
- What are profits margins in general in the sector?
- Is the business’s industry growing or slowing?
- What about the business’s competitors?
- We advise buyers to do a SWOT analysis and research each competitor’s strengths and weaknesses.
- Compare the competitor’s products. What are their costs and earnings compared to your potential new business?
- What threats do competitors pose to the business?
- How much market share does each competitor hold?
Product and service due diligence
This type of due diligence allows you to learn more about each of the products and services the business provides.
- Get a list of all provided products. In Spanish Solutions case that might be: NIE Number, Conveyancing, law cases, divorce and probate, for example. All very different, yet related.
- Learn the cost to produce each service.
- Determine how profitable each product is while bearing in mind some services are loss leaders.
- Look at past and projected growth rates. Is Residencia going to be a thing in 2020? Is there a property boom coming to Spain in 2021?
- Investigate what enhancements have been made to the services and what future enhancements are possible and likely to be needed.
Staff and management due diligence
Otherwise known as, Human capital due diligence, this looks at a business’s team. It allows you to investigate skills and qualifications, and any gaps in the process.
- Get an organizational chart. Who is doing what exactly?
- Put together a list of current employees, positions, earnings, duties, skills, and qualifications.
- How do employee wages compare to wages of people in similar positions in the industry and the region?
- Learn about the business’s time off policies, holiday, work from home policy etc.
- Get an estimate of the business’s projected staffing needs, especially if you plan to expand.
- Note; Staff in Spain tend to not change positions often, certainly much less than Ireland and the UK. Once again, there is good news (settled team) and bad news (sometimes stale workforce) in this simple fact.
So, are you thinking about buying a business in Spain to start your post-Brexit and post COVID journey into small business ownership?
Do you want to acquire another small business in Spain to help you get out of your current rut? Are you looking to expand your existing business with a Spanish “add-on”- Like many estate agents, lawyers and financial planners do?
If you answered yes to any of these questions, you are not alone, especially in 2020! You do need to know about due diligence and how it can inform your purchasing decision.
We advise you to hire an accountant and a lawyer.
You can certainly be involved and look over documents, it’s best to have professionals on your side. Trust your gut, but trust your lawyer too. The lawyers we work with know how to look for red flags.
The owner of the business will be happy to open their books once you sign a confidentiality agreement.
You will need to look at several aspects of the prospective business or product as mentioned above. Each business is different and the ways businesses are handled in Spain is different- Accountants, in particular, operate very differently here- be patient, ask the right questions and good luck!
Spanish Solutions are here to help whenever you need us!