Valuing a business is one of the most important things to get right in the process of buying a business. Unfortunately, it's also one of the most difficult. You need to know that you’re paying the right price for the business you’ve set your heart on. The only way of doing this is to carry out in-depth research.
One of the best ways to start your research is by talking to people. Speak with customers and suppliers as well as the vendor. They may give you information about the business, or even the market in general, that you wouldn’t have considered checking.
You need to know how healthy the business is. Things to find out include the business’ history; its current performance including turnover and profit; and its finances: debts, expenses, assets, and cashflow.
You should also find out 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 – make your own profit projections.
Other factors to consider when evaluating the business 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. A business is really only worth anything if it can pay for itself over a reasonable period of time. You want to make a profit as soon as you can.
Unfortunately, the general rule is that the higher the risk, the higher the potential return should be.
When you have a good idea of how much the business is worth, you'll be in a position to know what you’re prepared to offer for it.
For your own peace of mind, it's a wise move to get a valuation from an accountant or a professional business broker too. An expert opinion could well be worth its weight in gold.