You’ve decided to purchase a business. Excellent decision! Buying a business may be the most effective strategy to improve your wealth. You’ve discovered this beautiful, prestigious business with tremendous potential, and you know you’ll adore working there for the rest of your life, or at least till you have amassed a small fortune or enough to retire.
Now the Seller is seeking a reasonable amount, but how did they arrive at that figure? Valuing a business is often an unclear process that involves more judgment than fact. The market value of your business is the amount that a reasonable buyer would pay and seller what a seller would accept in a typical market of business transactions.
If you are reading this article, you are really above average, as most individuals who attempt to purchase a business do very little research and preparation. As a result, they either do not end up acquiring a business due to anxieties or insufficient cash or they may even buy the business and fail due to inadequate planning. So, how much is the company really worth?
Here are four Tips to assist you in evaluating the value of your business
1) If the business is profitable, how much profit does it make? I’ve seen business brokers and Sellers agents make all kinds of great forecasts about what the company should be producing and then attempt to sell it based on that figure.
If a business broker or seller can foretell the future, they should be in the stock market rather than entrepreneurship! If the price is based on profits, and those earnings are based on “Pro-forma” or predicted income (rather than actual), then disregard whatever price they place on the business.
You are purchasing revenue rather than income potential. Future income potential is always a good reason to buy but it is not a reason to pay more than the current run rate of the business.
2) If the business is losing money, it is worth the current resale value of the assets less the debt you are taking. This implies that if a companies has one widget purchased for $100,000 and business debt of $20,000, you have no idea what the business is worth!
If you can sell the widget for $40,000 and your business debt is $20,000, your business is worth $20,000.
3) What is the value of the business to you? The majority of the purchasers are more interested in purchasing a business that can provide a steady income to support themselves and there family and also establish growth and future equity.
As a result, purchasing a business entails substituting a full-time paycheck for less effort as your former position. People desire self-employment for several reasons, including money, pride, the ability to spend more time with family, etc.
Make a list of ten reasons why you want to be self-employed. Put a price for each item you’ve listed. If any of those prices are “infinite,” self-employment is the way to go.
4) Set your price based on past performance or what the previous owner received. – Always pay for previous performance rather than what the business might or should be.
Remember that you are the buyer, and you should base your pricing on how much money the former owner received from the business. All official and informal business appraisals can also be helpful in determining real market value of a business
Please keep in mind that off-book money cannot account for the price! Off-book money is money that has not been disclosed to the IRS. If the seller does not report it as income or benefits, it does not count in determining the price.