There are many different methods of valuing a business. Some investors use discounted cash flow, others use a multiple of earnings, some look at appraised assets. If you are in the same business as the business for sale that you are looking to acquire, what synergies exist between the two companies? The amount of savings that can be generated needs to be factored into the purchase price. If you are looking to acquire a competitor who keeps low balling the prices, if you were to acquire them, that gets rid of a competitor which will result in higher prices, you need to factor that into the amount that you will offer for the business for sale.
Here is a list of items which you should have when doing your valuation
- three years financial statements prepared by an external accountant. If the accountant has a designation, ie. CA, CGA, CPA, the accountant may have issued an opinion, a Notice to Reader, Review Engagement or Audit. Please read the opinion to determine how much reliance on the financial statements, if any, that you should make.
- internal financial statements from the last year end up to current
- normalize income for the last three years. Normalized income starts with the net income reported for tax purposes and removes all personal and non reoccuring expenses which would not exist under the new owner.
- normalized earnings should also review the salary taken by the owner. If they have not taken any salary and they work full time, then you must deduct an amount that you would have to pay a third party to do your work. If you took out $100,000 but you need to pay a third party only $50,000, you are adjusting the net income higher. The additional $50,000 is really the profit of the business and not a true salary
- appraisal of fixed assets, if available. If you are buying equipment, has it depreciated in value, what is the cost to replace the equipment in the current condition? If the equipment is not worth anything however as scrap, it is worth something, you need to factor that into the value. I saw where an investor purchased a building and there were hundreds of feet of stainless steel piping and vats in the property. The scrap value of that abandoned equipment was very significant.
- copy of all leases
- analysis of customers and suppliers. You may not want to disclose names however, what percent of the sales were made to the top 10 customers. the analysis should break this down into customer, you can use customer #1 for example is 20%, customer #2 is 5%, customer #3 is 4% etc.
- do the analysis for the suppliers. The purpose of both of these analysis is to determine the economic reliance you have on customers and suppliers.
- copy of the last year income tax return, as a minimum, up to the last three years.
- copies of all Notice of Assessments of all taxes including but not limited to income taxes, GST, HST, provincial sales taxes (PST), WSIB etc.
- dates of the most recent audits from any of those government agencies with reports, if available
This is a partial list items which you should review when determining a value of a business for sale to see if it is in agreement with the asking price of the business for sale.