Searching for a business to purchase can be difficult at best. One of the most important issues to address as a buyer is the value of the business. How can you determine how much the business is worth?
Many factors contribute to a business’ value such as pre-tax profit or seller’s net discretionary earnings. Other factors include business asset value, long-term performance, name recognition and terms offered by the seller. For example, you might be willing to pay more for a business that provides 100% seller financing or for a business that has had steady growth every year since opening over a 20 year span of time.
Barriers to entry also impact business value. Perhaps you were considering a business that holds exclusive rights for distribution within a specific territory with little or no competition. Or, a business may be highly specialized and require specific licensing that makes start-ups very difficult.
Finally, you have to create and carefully examine your own pro-forma that details your projected revenue, expenses and net. This business planning is developed by utilizing actual business performance history complimented by what you believe your ownership and management will produce. If you cannot make your numbers work, no value will make sense for you.
You can reference industry value rules-of-thumb or you can ask a professional to assist with valuation. At the end of the day, a business is worth some factor of the owner profit it consistently produces.