Prospective purchasers should only buy a business after due diligence, which means getting and analysing all the information you need to decide whether to buy and how much the business is worth.
Failing to take time to find out about all aspects of the business may result in a costly mistake. The information you get and analyse should relate to all areas of the business, both financial and non-financial. Get detailed professional valuations of all assets and liabilities of the business you want to buy to reduce the risk of making a bad purchase and give your potential business the best chance of success.
What is the value of the business?
The selling price is usually set by the owner who arrives at the sale price in a number of ways. It might be based on the previous purchase price, the original investment or by comparison with other businesses on the market. Other methods include the value based on future earnings, or on a comparison with the cost of setting up a similar business from scratch.
How should you assess value?
Like any asset, a small business is only worth what someone is prepared to pay. But an objective assessment of total worth will include a valuation of:
- Work in progress
- Intellectual property
- Liabilities of the sellers business
There are many reasons you may need to know the value of your business -- if you are considering buying a business, a merger or outright sale, for tax or loan purposes, or for estate planning. Whatever the reason for needing to know this information, trying to come up with a valid figure can be a major effort and challenge.
A realistic business valuation requires more than merely looking at last year's financial statement. A valuation requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy and how the subject company will compete.
This is why professional help is essential.