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Learn to buy a business
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What a Business is Worth
You may have heard that a business is worth what someone will pay for it. There is some truth to it, but even so, the price has to make sense to both a buyer and a lender. When pricing your business, two important factors must be kept in mind: Price cannot be based on future earnings unless the seller will guarantee them and lenders require three years of business tax returns to finance goodwill.
Pricing a business is the most important aspect of selling a business and it generally is not a simple process. Several methods can be used when pricing a business, but for this presentation we will deal with the three most common methods:
The first is the Basic Method, which is the value of a company’s assets, including inventory, plus one year’s cash flow.
The second is the Comparable Sales Method, which is also referred to as comps. This is the value of the business based on the sale of similar businesses in recent months or years.
And finally the Capitalization Method, which is the Bank’s way of valuing a business. It’s based on the industry, trends, risk factors, competition, location, as well as several other factors.
When pricing your business you must also keep in mind that people buying a business are “Buying a Job” or making an investment – in either case they’re looking for a return on their investment. As a result most businesses are priced based on profit, not gross sales. Most banks will loan on assets but only the Small Business Administration will loan on goodwill, which is the business cash flow or net profit.
If you choose to have your business priced by one of many companies who perform business valuations, you should not pay more than $2000 for their services. An important factor to remember is that forecasted earnings cannot be used in the calculations unless you are willing to guarantee them to a new owner.
Keep in mind – you’re competing with other businesses on the market. Your business must be priced competitively to meet your goal – selling your business. |
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