Valuing a business is one of the most important but difficult things to get right in the process of buying a business. You need to know that you’re paying the right price for the business you’ve set your heart on, and the only way of doing that is to do some of your own research.
One of the best ways to start your research is by talking to people – customers and suppliers as well as the vendor, for example, may give you information about the particular business or the market in general you wouldn’t have thought about checking. You need to know how healthy the business is, so things to find out include the business’ history, its current performance – turnover and profit, its finances – debts, expenses, assets, cashflow, and why it’s being sold. If the previous owner has to sell it because of a fall in profits, for example, it will bring the price of the business down.
Apart from the aspects listed above, there are also intangible assets to value. These could include the business’ relationships with suppliers and customers, its reputation or intellectual property.
Don’t necessarily rely on the seller’s profit projection figures when working out the business’ value – use a professional and make your own profit projections.
Finally, other factors that will affect the value include stock, employees, products, premises and competition.
Once you’ve looked at all these factors, you should be able to work out a return on investment – which is a straightforward way to value a business.A business is only worth as much as its ability to pay for itself over a reasonable period of time, and then start producing profit.
And the general rule is that the higher the risk, the higher the potential return should be.
This should give you a good idea of how much the business is worth, and what you’re prepared to offer for it. But it’s still important to get an accountant or other professional in to give you an expert opinion on the business’ value.
