Buying a business is an exciting time for any entrepreneur.
By purchasing an existing business, you can avoid many of the risks that come with starting a venture fresh from the ground up. The company you plan to acquire may already enjoy brand recognition, a solid customer base, or profitability. You can infuse a growing business with new capital and build upon its proven formula for even greater success.
But you must do your due diligence before you commit to purchasing a business or any business assets. One of the most important parts of a business purchase transaction involves establishing the worth and sales price of the business.
The only way to find out how much a business is worth is to evaluate the financial records and daily operations of the company – ideally, with the help of a trained professional and negotiator.
Despite being a business transaction, emotions can skew the perceived worth and value of a company. You may get excited and emotionally invested when you find a business you really love. Plus, the current owner has probably poured their own time and money into the venture. To them, the company may be worth much more than the number on paper.
The more thorough your due diligence, the stronger your position will be at the negotiation table. The last thing you want is to buy a business without an accurate understanding of its prospects and liabilities. You could end up overpaying or even worse – taking on unknown risks or debts that could sink your investment after the ink has dried on the sale.
How Is a Business Typically Valued?The process of valuing a business isn’t always as objective as you might think.
Even with advanced appraisal formulas, the future is impossible to predict. Your evaluations can certainly get more confident with the more evidence you have. But many aspects of appraising a business are subjective or intangible – for example, determining the value of brand recognition or customer goodwill. You and the seller may disagree on how much these are worth.
Even if there is no “perfect price,” you can use different valuation formulas to get to a reasonable price range that both buyer and seller can agree upon.
You don't want to take any shortcuts when evaluating the worth of a business. You want to make sure you've left no stone unturned so that you don’t encounter any surprises later on.
How Do You Determine the Value of a Business to Buy?When determining the price of a business you want to buy, you can expect to negotiate within a price range with the seller, taking into account the company’s financial health.
The lowest end of the price range would cover the current market value for any of the assets the company still owns, minus its debts. This might be the case if a company is going out of business and liquidating its assets – and you don't plan to continue operating it.
The higher end of the price range would cover any business assets plus expected earnings for the future. If the business you plan to buy has a solid reputation and strong customer base with a high likelihood of increasing revenue and profits, that will affect the purchase price.
But assets and revenue aren’t the only factors to consider in a business purchase transaction.
When you buy a business, you get more than just a company. You could be investing in a personal dream, a lifelong goal, or a new adventure. You want to make sure you get the most of the new venture you’re getting into – and the best way to do that is to have a business lawyer on your side, covering your back and watching out for unexpected curve balls. You want a seasoned negotiator who can get you the best deal possible.
Thinking of buying a business? Get the experts on your side. Call the Philadelphia offices of Holmes Business Law at 215-482-0285 or use our contact form to get started now.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.