How to Value a Business for Sale: Learn to Value it For Acquisition
Whether you are buying or selling a business, you must first determine its value and potential for income. A business is not marketable on just its’ reputation alone. There are many factors to consider when you are trying to discover its worth.
How to Determine the Value of a Business for Sale or Acquisition
- Tangible assets, such as computers, furniture and other equipment and products have potential monetary value. The condition they are in will determine their value further.
- When researching the assets figure out how much they figure into the company’s profits. For example; top of the line, high quality and popular equipment and machinery that draws in customers are assets that probably increase the value of a business. On the other hand, out of date computers and equipment will most likely not be considered strong assets.
- Establish an amount that these assets would generate if you had to sell them within a short period of time.
- Research comparable business to find out their worth.
- Research the marketing area where the business is located to determine how much customer base can be generated in the area.
- Even like businesses are not exactly the same. Use this method only to get an idea for the type of business, not as the model for determining its total worth.
- Study the tax returns for at least the past three years. Five years of tax records would give you a better understanding of the company’s financial records.
- Look at P&Ls (Profit and Loss) statements for the last several years. This will give you a good idea of the profit and loss margins in the various accounts. From these statements you will be able to see if, say, the company has been steadily profitable in sublet vendors but has always had a problem making a profit in labor and employee benefits.
- The business plan will provide you with projections for at least five years. Using past tax and financial records along with the business plan will let you see the accuracy of these projections.
The Current Success of the Business
- An established customer base is important to consider when figuring out the value of a business. These customers are already familiar with the company and will likely continue as customers even if ownership changes. However, keep in mind that not all customers will automatically stay. Some customers do not like change of any kind and may be intimidated by a change in ownership.
The Reason for Buying or Selling the Business
- If you are selling your business, the reason why you are selling has an impact on the value of it. If you need to sell because of financial hardship, for instance, you may put a lesser value on it just to be able to sell it quickly.
- If your intent is to buy a business, it is important to know exactly what you have planned. Are you buying a business and plan to take it over? Or, are you searching for a building that will meet your needs to establish your own business? If you want to take over ownership of a particular business, then the value may be worth more to you. If you are just looking for property to house your own business, the business, itself, may not have as much of a value to you.