Valuing a potential business is probably the most important thing to get right – unfortunately, it’s also one of the most difficult things to do. The best way of finding out if you’re going to be paying the right price is to carry out some in-depth research yourself and involve your professional team from the outset.
Start by talking to customers of the business, suppliers, and of course the vendor. They may give you information that you hadn’t even considered checking. You need to know how healthy the business is, by examining turnover and profit (or loss), the current performance of the business and having a good look at the debts, expenses, assets and cash flow. It makes sense to research the history of the business as this will give a good indication of how it has performed over the years.
You should also find out why it is being sold – if it is because of a fall in profits for example, it will bring the price of the business down. Apart from the points listed above you must also consider the value of the intangible assets of the business. These may include the reputation of the business, the relationship with suppliers and customers and intellectual property. When making an evaluation you should also consider the premises – are they in good repair? Employees must be taken into account, as well as any products produced by the company and the competition the business faces.
Once all these factors have been considered you should be able to calculate the return on your investment. Commercial partner Matthew Fretten, says “A business should be able to pay for itself over a reasonable period of time and the general rule is that the higher the risk the higher the potential return should be. Don’t rely on the seller’s profit projection figures when working out the value of the business – make your own profit projections and involve your accountant at an early stage to avoid any costly errors . When you have a clear idea what the business is worth you will be in a position to know what you are prepared to offer for it and you can then start the legal process to get the deal done.”
For a free initial chat, please call 01202 499255 and Matthew or a member of his team will be happy to discuss any questions that you may have.
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