Typically businesses are sold based on their past performance because past performance is a reasonable indication of the future as long as there has not been any adverse change to the business. When a new listing appears, they will give you historical sales and profits. If the current economic downturn is affecting the sales, it may not show up in the current year’s financial statements. For example, if the business for sale has a December year end and the business had a banner first six months of the year, the slow down in the last six month may not affect the entire year’s financial statements. If you project the sales and profits of the last few months, then the projected profitability of the business may show a totally different picture. In this case, you should base the purchase and sales agreement on the projected earnings which are less than the historical earnings. If not, you may over pay for the business and you may find that the profits are considerably lower than your original projections, if you based only on historical information.
This article are provided for information purposes only, and are not intended as legal advice.
- When do you sell a business, before or after you issue financial statements?
- Selling a business – sell today or in 1 year?
- How fast will the value of your business return to the levels prior to the recession?
- Is now a good time to sell a business?
- Should you buy a business which is generating sales from the infrastructure stimulus?
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