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You have made the decision to buy a business. Good choice! Buying a business may be the best way to increase your personal wealth. You’ve found this wonderful and illustrious business that has incredible potential and you know you’ll love working there for the rest of your life, or at least until you make your first million 😉 Now the seller is asking a price that sounds right, but how do you did they come to that price? Valuing a business is more than often an ambiguous process that boils down to opinion rather than fact. The market value for your business is the price that a reasonable buyer and a reasonable seller would pay in a normal commercial sales market. If you are reading this article, you are not normal. I say it in a good way. You are actually above normal. Most people TRYING to buy a business do very little research and study of the process. therefore, they do not buy the business due to insecurity or inadequate financing or they buy the business and fail due to poor preparation. So how much is that business worth? Here are 4 tips to help you value the business.
1. If the business is making a profit, how much profit is it REALLY making? I have seen business brokers and listing agents come up with all sorts of amazing projections about what the business should be doing and then try to sell it based on that number. If the business broker or salesperson can predict the future, then they shouldn’t be entrepreneurs, they should be in the stock market! If the price is based on earnings, and earnings are based on “pro-forma” or projected (not actual) earnings, then forget about whatever price they put on the business. You are buying revenue, not potential revenue. If you want great income potential, I have a swamp land for sale for you in Florida that will definitely increase in value, one day.
2. If the business is losing money, it is worth the current resale value of the assets minus the debt you are taking on in the business. This means that if the company has 1 widget that they bought for $100,000, a business debt of $20,000, you don’t know the value of the company! If you can sell the device for $40,000 and the business is $20,000 in debt, the business is worth $20,000.
3. How much is the business worth to you? Most of the buyers I train are people who are more interested in buying a business/job rather than investing millions of dollars in a business that can go public. Consequently, buying a business means replacing a full-time income with twice as much work as your previous job. However, people seek self-employment for a variety of reasons, income, pride, the freedom to spend more time with family, etc. List 10 reasons why you want to be self-employed. Now put a price tag on each item you have listed. If any of those price tags are “infinite,” self-employment is for you.
4. The Four Ps: Choose your price based on past performance or what was put in the pocket of previous owners? – Pay for past performance: never pay for what the business could or should be. Remember that you are the buyer and should try to choose your price based on how much money the business has put into the pockets of previous owners. All formal and informal business valuations are established on “net present value.” Remember that the money off the book absolutely cannot represent the price! Off-the-counter money is money that is not reported to the IRS. If the seller did not declare it as rent or profit then it does not count towards the rent in determining the price.