How do you determine if you are paying too much for a business? When you buy a house, you can see what other houses have sold in the area but in a business, many businesses are private and you may not be able to obtain information regarding the sale of a similar business. Businesses are worth different prices to different people. Is the purchase synergistic? This means, can you create economies of scale by acquiring a business? I onced valued a business which had 7 locations. I valued it as a going concern assuming that the new buyer would not change anything. The owner of the business disagreed with the valuation. He said that he could get 5 times the price that I was valuing his business. I asked him how many companies would pay that price – the answer was 1. They would close down his 7 locations and amalgamate them into their existing business. the closing of 7 locations would reduce the rent, the labour and save the acquirer millions of dollars per year. As a result, he was willing to pay more than a person who would have to operate the 7 locations and was unable to lay off any staff to reduce expenses.
If you buy a business, can you improve bottom line? if you can get more sales, then the company means more to you but you do not necessarily have to pay the owner for your work. If you can create some synergies, the owner may be reluctant to sell to you unless you pay a premium because he or she may be giving information to a competitor with the expectation that the competitor is willing to pay more.
How much is too much to pay? blog to be continued tomorrow