If you want to buy a business, whether a small family owned one or a large one, you need to look at every aspect before arriving at a price that you and the seller agree to. The owner may think of the business in different terms and his valuation may be exorbitantly high as understandably he would like to get the best possible price for his hard work that went into creating a tangible business.
So what are the options for a buyer?
You need to get a professional evaluator and that is only the first step towards buying a business. You cannot accept any value put forth by the seller or borrower for your approval. He will have a sentimental value attached to the business apart from the tangible assets and measurable estimates. The business should be worth your time and money according to the criteria that you set.
What should you do
There are many ways that you can assess a business but the first and the most important thing is to get a professional assessor and let him know your requirements. The assessment will begin by evaluating the tangible and intangible assets of a company. This will consist of the tools, equipment, inventory, finished goods and existing clients etc. and will also include the balance sheet that will provide a clear picture of the financial status of the company.
The next aspect that you will look at is the revenue of the company. Revenue does not mean profit and the two values are calculated separately. The future revenue is calculated based on the past revenues and sales. It has to take into account any unusual revenue inflows and expenditure due to certain events in the past. This will provide a clear picture of the profits that could accrue if everything remains the same even after the company is sold.
Now when a buyer looks at buying a business, he needs to look at the brand and loyalty of customers. This is significant for all sizes of companies. Large companies have well-recognized brands, while small businesses have some loyal customers who may not like to deal with the new owners. All these aspects need to be factored in while evaluating the value of the business.
The most popular assessment is through the Earning Value Approach, as you need to know how will you be benefitted from the business. When a reputed assessor concludes his valuation and gives you a complete picture that includes all the factors, well-defined figures with clear financial values assigned to them, then you can understand and decide whether the business is worth your time and money or not. Do not buy a business without a detailed valuation.