Value of a Business

Buying a business for sale is a tricky process. Every expert in the field will tell you that 9 out of 10 businesses for sale have hidden secrets or some issues that the seller would prefer to keep under wraps. Determining whether these hidden little gremlins are going to be problematic or easily overcome can be a deal breaker or deal maker. On top of this, you need to asses whether the valuation placed on the business is realistic and if it is worth pursuing and negotiating over. All of these potential hazards can be a major worry to anyone buying a business and it is at this crucial stage when you need to do a lot of digging and investigation, more commonly known as due diligence. Unless you are a qualified accountant or a highly experienced business broker, attempting to accurately value a business yourself is a risky decision to take. Like any process that involves potentially parting with a large sum of money, would suggest that you would be wise to get several opinions. Most accountants will scrutinize over facts and figures and look at the bottom line - if the business actually makes any money! If you have a trusted accountant and the seller is willing to let you have sight of the accounts, you should speak to them first. If the seller doesn't want to allow you sight of the accounts then worry, worry a lot! In fact, in my experience, if this is the case, this would be a very strong signal to walk away. If the figures check out, your next best step is to have a bit of a fact finding mission and perform a recce on the premises, assuming the business is a retail or customer facing business. Getting a feel for the business and the level of foot through will tell you a lot. Okay so I am not suggesting that you need to perform a stakeout across the street but you have every right to ask the seller to sit and observe the business for a couple of hours on days when they claim to be their busiest and at their quietest. You'll be surprised how revealing this basic process is. Not only will it allow you to assess whether the sellers claims about business levels are true, it will also tell you how the business is currently run on a customer facing basis and whether this business appeals to you. sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish sayhispanish But what has this all got to do with the value of the business you may ask? A hell of a lot! The asking price of a business isn't just a figure when in actual fact, the true value of the business is collated from a number of elements. These being: Turnover, Profit and Loss Goodwill and/or Customer Loyalty Competition Geographical Positioning Liabilities Growth Potential Stability Employees & Employment Contracts Facts and figures such as turnover, profit and loss will give you the bare facts but sometimes, and often more than not, its whether you feel that the business is successful, whether it still has more potential for growth and whether you feel it can maintain a solid level of business that is suitable to your needs. You also need to assess what risk it carries with it. If you feel that you have a good hunch about the business, this can sometimes be enough for some. But, always perform thorough due diligence. If you feel good about the financials and the business appears to operate on a solid level, then you may be on the right track. if the business has neighbors, why not ask them how business is in the area? Their answers may be quite revealing. Lastly, if you have good business associates or acquaintances that can offer an objective opinion, then get them to take a look over the financials and the business as a whole. Ok, so you may not like their opinions in some cases, but a voice of reason can always help you to stop dreaming and get real. It's very easy to get carried away with the romance of running a business and forget that you're about to embark on a very expensive and huge change in your life. So where does this all leave us? Well, if you feel that you now have a good understanding of the business operations, financials and position within the market, you will do yourself no harm in writing a brief set of strengths and weaknesses about the business you intend to make an offer on. Remember, an asking price is only as "asking " price - a business is only worth what someone is willing to pay for it! Has the business been on the market a long time? Why is it being sold? What are the current local, national and global economies like? Important factors. In short, you are looking for ways to gather a figure that you feel is a true, fair and honest representation of the business value. Never go in at the asking price and always look to work with the seller towards the ideal figure that you want to pay. Remember, it's your money you are spending so spend it wisely. So if you feel ready to make an offer... stop. Talk to your lawyer first. Discuss with them all of the aspects of the business you have investigated and if you can get them involved early on, great. Their knowledge of due diligence and areas to investigate will be crucial to the deal. Yes, lawyers cost mega bucks but they could save you from the biggest financial disaster you have ever made. So before you get too eager and make that offer, tell them what you intend to offer, what the business is and what you have discussed with your accountant. A lawyer can help you to ask a few more telling questions that will hopefully, tie up any loose ends before taking the plunge. If at this stage you have then fully satisfied every area of pre-purchase due diligence, then you may just about be ready to submit that offer. Good luck and keep reading my other blogs to find out more about how to buy and sell small businesses successfully.