This is an incredibly important thing to look at. Detailed, accountant-style analysis is always out-of-style in the good times. When the tide turns and shifts downwards, all of a sudden the interest in liabilities grows.
I want to add that this exists in more places than finance. Home or building inspection is a classic example. It makes a difference to you (the buyer) if the roof is 1 or 15 years old. That means an immediate capital outlay that is not likely reflected on the balance sheet. Thus, you hire the experts (building inspectors) to find the goods and you negotiate accordingly.
As business is moving away from physical assets, this issue has diminished. However, I see three new areas for growth in debt-like items:
1) Cyber security. The mother of all if you are buying a tech-enabled or primarily tech business. A breach is a business killing event, the same as an oil spill to a resort owner. It's hard to know all the threats, but some are more predictable (keep your patches up to date, secure connections, don't share PII).
2) Tech debt. Will not have the PR consequences, but technical debt (https://en.wikipedia.org/wiki/Technical_debt) is a real term in our industry (I am a software engineer). This is exactly what is sounds like. If you have it, you have a huge outlay coming to the benefit of very expensive software engineers.
3) Process / systems deprecation. This one tends to dovetail with hiring issues. The operations relies on a system that is no longer in favor in the industry. Getting experts with this system costs more and more, eventually you have to do a migration. This happens with all systems at some point, but like the aforementioned rooftop, it matters how old the system is. A 15 year old internal software is a much bigger issue than something adopted a year ago.
Just expanding on the great perspective that Matt has offered. These IT issues are a goldmine for people in my business, but I don't want them to be. Buyers should be smart and get the sellers to own up to the risk at the point of sale.
This is an incredibly important thing to look at. Detailed, accountant-style analysis is always out-of-style in the good times. When the tide turns and shifts downwards, all of a sudden the interest in liabilities grows.
I want to add that this exists in more places than finance. Home or building inspection is a classic example. It makes a difference to you (the buyer) if the roof is 1 or 15 years old. That means an immediate capital outlay that is not likely reflected on the balance sheet. Thus, you hire the experts (building inspectors) to find the goods and you negotiate accordingly.
As business is moving away from physical assets, this issue has diminished. However, I see three new areas for growth in debt-like items:
1) Cyber security. The mother of all if you are buying a tech-enabled or primarily tech business. A breach is a business killing event, the same as an oil spill to a resort owner. It's hard to know all the threats, but some are more predictable (keep your patches up to date, secure connections, don't share PII).
2) Tech debt. Will not have the PR consequences, but technical debt (https://en.wikipedia.org/wiki/Technical_debt) is a real term in our industry (I am a software engineer). This is exactly what is sounds like. If you have it, you have a huge outlay coming to the benefit of very expensive software engineers.
3) Process / systems deprecation. This one tends to dovetail with hiring issues. The operations relies on a system that is no longer in favor in the industry. Getting experts with this system costs more and more, eventually you have to do a migration. This happens with all systems at some point, but like the aforementioned rooftop, it matters how old the system is. A 15 year old internal software is a much bigger issue than something adopted a year ago.
Just expanding on the great perspective that Matt has offered. These IT issues are a goldmine for people in my business, but I don't want them to be. Buyers should be smart and get the sellers to own up to the risk at the point of sale.