When you are buying a business for sale, the vendor has come up with a selling price. How do you know it is a reasonable price? When you are looking to purchase a house, there are lots of other houses in an area which may be similar to your house therefore you have an idea of what your house is worth. If however, you have a custom house and it is on a bigger lot and your house is considerably larger than anything in the area, how do you value the house? You need to do more work to try to determine what a comparable house would be to determine your asking price. In business, every business is different. A business may look like another, for example a franchise, but each franchise has a different value because sales and profit are different. Businesses are much harder to value.
Since there is no central listing service for businesses for sale, selling prices of businesses are not publicly available. Therefore you may not have a guideline if you are trying to determine the asking price of the business yourself. Business brokers and accountants who are in the business of buying and selling a business or consulting to those which are bought and sold will have an idea of the selling prices based on prior businesses which they have been involved in. From a buyer’s perspective, you do not have the inside information about the firm. There are many different aspects of the business which may not be communicated to you and you need to try to investigate before determining the asking price.
Here is a list of some questions which may be helpful to you in determining a purchase price:
- did the business just land a large account, will it be a one time account or for a defined period. My last few blogs discussed infrastructure building by many governments. If the business which you are looking to buy is working on infrastructure projects, will the business be for a predetermine period of time only and will not continue in the future. As a result, the ongoing profitability of the business may be limited and this should be factored into the price that you are offering for the business
- is the business about to lose a large customer?
- are some of the customers in financial difficulty. Many people look at the sales to the top customers, do you compare this to the trend over the last few years. Sales to one customer may be high one year, but low the year before. Could the increased sales be for a limited time?
- does technology impact this business and new technology affect future sales. For example if you are selling VCR, the market for these are very limited being replaced by blue ray players. Now that 3D is being developed, will that have an additional impact on your sales and your inventory. Digital technology changed the printing industry but many firms may still have older presses which are not as cost efficient as the new machines
Blog to be continued