This article are provided for information purposes only, and are not intended as legal advice.


Why is it so difficult to value a business – Part III?

May 22nd, 2009

The previous two blogs show why businesses although they may appear to be the same are all different.  There are many different items which need to be factored in to the valuation of a business for sale namely:

  •  revenue – is this a company generating $10,000 of revenue of $100 million.  The higher revenue will appeal to different buyers and the higher the revenue the greater the multiple will be attributed to the business
  • profitability
  • is there any staff and/or management in the business
  • type of business, retail stores are valued less than a manufacturer
  • location of business
  • number of competitors or is the business unique and proprietary
  • ability to grow or are you at the peak of the business cycle and revenue will remain constant (i.e. a mature business)
  • is this a start up?
  • economic dependence on suppliers and/or customers.  If there is economic dependence, that may affect the valuation
  • if you are in a leased premises, will the lease be renewed
  • will the employees stay with the new owner
  • will there be large severance costs if long term employees were terminated?
  • is the business relocatable
  • is the business for sale being purchased by a synergistic competitor?
  • is the revenue of the company increasing or decreasing?
  • is profitability increasing or decreasing in the current business environment
  • did the business for sale lose any large customers recently?
  • did the business for sale just get a new customer and are hoping that the new customer will make the company profitable?
  • are there any external factors affecting the business or the industry.  For example, if your business caters to the automotive industry and there is a slowdown in the industry and there is a risk that the business could be lost, what impact would this have on the future earnings of the company
  • size of customers.  If the customers are all large well known companies, it is easier to acquire bank financing for working capital than if the customers are all out of the country and the chance of collecting the receivables may be low
  • is there a lot of retained earnings in the company?
  • is the company cash flow positive or negative
  • are retained earnings included in the purchase price or will they be stripped from the company prior to closing
  • is this a share vs asset purchase?
  • is there real estate in the company? 
  • is the fair market value of the assets greater than the book value?

 

This is a partial list of the factors going into the valuation of the business.  This shows that there are so many different factors that go into the calculation that it is difficult to state that the formula to buy this business is based on a definitive multiple of earnings.  All factors should be considered when valuing the business which you are looking to purchase.


Filed under: valuation of a business — Gary Landa @ 10:32 am


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