Buying and Selling a Business
Buying a Business
Every buyer needs to answer the following questions:
What is a fair price for the business? How can that be determined? Why does the seller want to sell? What are the rules of the game?
How can you tell if the business is a genuine going concern or if it is someone else’s discard? What should you look for? How do you check it out?
What should you offer for the business? What are the trade-offs between price and terms? How can you tell if the owner really wants to sell, is just testing the waters, or hopes to catch fool?
There are three basic approaches you can use to locate a business that is for sale: (1) Contacting business owners directly; (2) Contacting business owners indirectly through their service providers; and (3) using a business or real estate broker.
Selling a Business: Methods of Appraising Small Business
When selling or buying a business, it is paramount to understand how the value of a business is determined. There are several ways to find the value of a business. They include:
Accepting book values as correct: The value of a business is the summation of: current and capital assets, less liabilities. This method estimates book value, which rarely reflects market value.
Adjustment of book values to reflect current market values: The value of a business is the summation of: current and capital assets valued according to open market, less liabilities. Market value estimates for real estate is obtained and machinery and equipment value is taken at cost, less accumulated depreciation.
The comparative sales approach to market value: This approach determines the value of a business by directly comparing it with similar enterprises recently sold or currently held for sale. These market value indicators are adjusted towards the subject based on similarities and differences.
Sum of the assets: Ever asset of a business is individually appraised and the going concern value is found by summing the respective value contributors.
Capitalizing or discounting of net profits: This approach discounts or capitalizes historical average or pro forma net operating profit, producing a single estimate of going concern value.
Discounting projected net earnings and cash flows: This method is the same as the previously mentioned technique, but projected into the future.
Valuing a Business
In order to better serve clients, Gannon University’s SBDC has been actively finding ways to provide more in-depth consulting that truly impacts a company’s performance. We can provide assistance with understanding the factors that increase and decrease the value of a company, which can help you better understand how to increase your company’s value.
Our clients are not provided with a business valuation; rather we provide a business valuation analysis, which includes a review of the information that would typically be requested by a valuation expert.