HOW TO VALUE A BUSINESS
Deciding to sell your business or grow your business by acquiring another company?
As everybusiness is unique, determining the value of a business is one of the most critical aspects of any transaction. The terms of the deal is another determining aspect... the more you know, the better prepared you are to consummate a deal!
Assets, liabilities, historical earnings, cash flow, projected earnings, future cash flow, current market conditions, industry popularity, and, most important, the objectives of the seller or buyer as well as the value of intangibles (patents, know-how, the quality of management, leases) are all taken into consideration to determine a company's fair market value.
The final selling price can be either higher or lower than the estimated range of values for the company, depending on the eagerness of the buyer to buy and the seller to sell, the demand for the type of company, the form of consideration paid, the negotiating skills of the parties, and most importantly, the terms of the deal.
In order for a buyer to formulate a fair market opinion of value, the seller will need to supply the following:
- Three years of tax returns, and financial statements.
- Copies of all contracts and leases and property tax bills
- History of the business
- List of key persons with job descriptions and salaries
- Seller Criteria and Information Sheet
- List of Equipment
Valuing A Business
Below is one method of valuation which can be used in purchasing a business and determining its market value. Not included but to be considered is "Good Will" the value attached to the business's Name and Reputation. This is what creates the revenues of the business. There are many other factors that must be considered when placing a price on a business.
The key to having a credible and viable valuation performed on the business is to have it performed by an independent third-party. Without this service the seller should be prepared for heavy negotiations due to the conflicting opinions of the seller's opinion of value versus the buyer's valuation.
Buying a business is an intensive and emotional process even though it is considered "numbers." Also to be considered is the owner's personality if you are going to have him hold a note (or the buyer's personality if the seller is going to hold a note...and a note is almost inevitable uneven with SBA financing). Also important is the transition of the business...are the employees going to stay, is the business going to be re-located, the value of any inventory at seller's cost, ...so many other factors are important other than the price.
