If you’re currently trying to buy an already existing business, the current owner will likely ask you to make them an offer. This is at times the hardest part of making any purchase, as it can be hard to determine something’s worth unless you have studied it before. The goal is to ensure that what you get is worth the amount of money you pay for it.
There are numerous methods you can use to determine the value of a business. The business you wish to buy is worth what you think it is but you can use different aspects to make an estimation. These include the value of the business assets. The assets comprise of equipment and other inventories owned by that specific business. Consider the liabilities if there are any and most importantly, conduct due diligence to help you understand what you are about to get in to.
Conduct due diligence
This is the first thing you should consider doing before purchasing a firm. Do a thorough assessment of its financial position, assets, legal status, accounts receivable and equipment. All these will give you an overview of the business’s total value before estimating how much you should pay for it. You can let experts do the assessing for you, as they have the necessary knowledge and resources concerning the matter, something that you might lack. Do not forget to study the business’s reputation by checking with its vendors, customers, and suppliers to know their good faith as this will determine if they will be willing to continue doing business with you after taking over.
The seller should at least give you a detailed list of what is included in the sale contract. The assets may entail inventory, buildings, land, equipment, business name, employees, customers, vendors, and suppliers, not to mention its intellectual property. When it comes to the equipment, ensure that you have their dates of purchase, model, maintenance schedule and their operation status to help determine their depreciation value. Consider if any of the stock inventory is obsolete and if there are any perishable items, consider their expiry dates. Check if the receivables are collectible and ensure that there no disputes involved.
What about the liabilities
For starters, who will be liable for the business loans and liabilities after taking over? The nature of assets primarily determines this. In a worst-case scenario, the company’s previous lender could have the power to seize the assets if you are unable to settle the debts on time. In such cases, you could be left with nothing. Ask the seller if s/he has signed any previous agreements that could affect the value of the assets or your freedom of action. If that is the case, you may want to consider just purchasing the assets of the business and not the business itself.
What’s the market value?
If you are looking for a business for sale, the chances are that you have already gone through listings on different sites in your area of choice and you already have a clear idea on the market value range. It is therefore easy to determine the minimum and maximum amount to pitch as your offer. This should also be determined by the area that you are looking at. For example, businesses for sale in Los Angeles or other major cities in California will likely require a greater offer than businesses located in the middle of the United States. Once you’ve determined the worth of the location, you can then perform an assets appraisal to identify the specific business’s true value. Make sure to also look at its accounts receivable, especially if it deals with many customer accounts. Let an expert help you in the valuations for better results.
You could take it for a test
Before signing the purchase agreement, you can ask the owner to let you take try to run the business for a small amount of time. This can help you find out more details that you could not acquire by merely asking questions. It will also give you an idea of what to expect, including the sales and profits you could gain from it. If the seller agrees to this, it could be a good sign, and it shows that you are serious about buying the firm.
Any individual who buys shares in business gets a stake in it, and this includes all the business assets and liabilities. When you buy the company, it could mean that you will be involved directly in the management, or you could become a silent partner. It is up to you to decide which choice will work for you since each comes with different transition requirements.
After doing these evaluations and coming up with a reasonable price offer, you can tell if you can truly afford the business. If you cannot come into an agreement even after negotiation, it is time to move to the next opportunity and follow the same tips to evaluate its worth.