has anyone here ever bought an existing business before? if so, how do you determine the value of the business when making a proposal? is it the cost of inventory, email list, the brand, legal assets, etc.? I'm trying to figure out if there's some formula that people refer to when assessing value. any ideas?
buying a business
- Thread starter gaseousclay
- Start date
It will depend on the type of business you are buying. Valuation of capital equipment, inventory and sometimes goodwill is taken into account. Your best best is to get a professional valuation done by an appraiser. Good luck.
Another good thing to remember is to look at the books, the REAL books. Whether for tax reasons, etc a lot of businesses tweak their books. I also agree with Andrew--get a professional appraiser.
Here is a small book(let) on that very topic. I suggest you DO NOT buy it. I did and it is basically useless.
http://www.amazon.com/gp/product/0967126703/ref=oss_product
Having said that, perhaps you could search Amazon for a better book on the topic. In addition, many of the "Value Investing" books cover the topic from an investing point of view. They take the position that when you are buying a stock you are actually buying part ownership of the company and propose a variety of techniques for determining a value (fair market price) of the business. These ideas may come in handy.
A professional may be your best bet, but learning a bit about this on your own may help you understand what the professional is doing and give you more (or lees!) faith in the results.
http://www.amazon.com/gp/product/0967126703/ref=oss_product
Having said that, perhaps you could search Amazon for a better book on the topic. In addition, many of the "Value Investing" books cover the topic from an investing point of view. They take the position that when you are buying a stock you are actually buying part ownership of the company and propose a variety of techniques for determining a value (fair market price) of the business. These ideas may come in handy.
A professional may be your best bet, but learning a bit about this on your own may help you understand what the professional is doing and give you more (or lees!) faith in the results.
Excellent suggestion.
Good valuator, and a good corporate lawyer are your key... A Good accountant is invaluable as well if you have the money. It is best to get set up right in the beginning.
It could be as simple as issuing a different class of share ( a paperwork thing) which will allow you to split income to children which could save you alot of money in a generational transfer.
Best to arrange things right off the bat.. Once you know your rights and get things set up right it will be a good investment in the future..
Good luck!
Oh.. and I would suggest buying only the assets of the business in most cases... If you buy the company shares you buy the liabilities and risks. But as always, visit a licensed professional in your area...
It could be as simple as issuing a different class of share ( a paperwork thing) which will allow you to split income to children which could save you alot of money in a generational transfer.
Best to arrange things right off the bat.. Once you know your rights and get things set up right it will be a good investment in the future..
Good luck!
Oh.. and I would suggest buying only the assets of the business in most cases... If you buy the company shares you buy the liabilities and risks. But as always, visit a licensed professional in your area...
If you'll be taking out a loan to finance this purchase, your bank will likely do their own assessment and evaluation. They're not going to loan you $1M on a business that's only worth $100K.
Whether or not they approve your loan, ask to see their paperwork. They should know what to look for and which numbers will carry the most weight in final tabulation.
In either case, whether approved or not, get a second opinion. The SCORE group I mentioned above should be able to evaluate the numbers and give you a good idea of the feasibility of your business plan. (You *DO* have a business plan, right?)
some multiplier of the profit ... If it is a business large enough to get a loan for, your bank will probably have some history and limits on what they will loan on. As mentioned by dpm802, there are free small business resources from private secor, as well as the US Govt has small business resources. They can help you see what similar businesses are worth and important considerations on running a buisiness.
You should create your own business plan, and compare it wih the history of the business you are looking at. Most businesses starting out have negitive cash flow. How long can you support a business with a disruption or low income ? A well established business should have pretty reliable expenses, rent,utilities, etc. Estimating sales is where you get in trouble. Buying a bar or resturant can depend on fashion or flavor and go sour quickly if you are not hot. Selling heating oil in the north west might have wide swings based on weather and world politics. Know your market, expect the unexpected expenses and be prepared to work 24/7.
You should create your own business plan, and compare it wih the history of the business you are looking at. Most businesses starting out have negitive cash flow. How long can you support a business with a disruption or low income ? A well established business should have pretty reliable expenses, rent,utilities, etc. Estimating sales is where you get in trouble. Buying a bar or resturant can depend on fashion or flavor and go sour quickly if you are not hot. Selling heating oil in the north west might have wide swings based on weather and world politics. Know your market, expect the unexpected expenses and be prepared to work 24/7.
I'd do surveilance if it is a walk in type of buisness. Sit there and see the foot/auto traffic then check that against the books he shows.
I think of this myself, point being your efforts will improve an existing business not being ran properly. I guess you need to weigh the factors such as buying a customer base. These existing customers can go anywhere is my fear and I wonder how much that is worth.
I ask people all the time, what buisness would you start as a point of conversation. Pick brains and maybe get a base for an idea.
I think of this myself, point being your efforts will improve an existing business not being ran properly. I guess you need to weigh the factors such as buying a customer base. These existing customers can go anywhere is my fear and I wonder how much that is worth.
I ask people all the time, what buisness would you start as a point of conversation. Pick brains and maybe get a base for an idea.
All good suggestion, but one that can't easily be indentified by looking at the books is the loyalty level of the customers.
Small businesses that aren't walk-in retail establishments generally are relationship-building enterprises. The business owner has worked hard over the years to establish these relationships with his customers, and his customers remain loyalty because of the service he provides, even if in many case the actual products or services could be purchased elsewhere for less money.
If this business is one whose customer loyalty is tied to the business owner's reputation, then you run the risk of losing their customers once you buy the company, unless you can work it with the seller to have him personally contact his customers to inform them of the transition and endorse you as his trusted successor. If you've never worked in this business, or have no reputation in it, you're going to have a major challenge in retaining the customers you've bought. Unless, of course, you want to strike it out on your own and build your own customer base. In that case, you're better off following the advice of others here and just try to buy out the capital assets rather than the business itself.
Jeff in Boston
Small businesses that aren't walk-in retail establishments generally are relationship-building enterprises. The business owner has worked hard over the years to establish these relationships with his customers, and his customers remain loyalty because of the service he provides, even if in many case the actual products or services could be purchased elsewhere for less money.
If this business is one whose customer loyalty is tied to the business owner's reputation, then you run the risk of losing their customers once you buy the company, unless you can work it with the seller to have him personally contact his customers to inform them of the transition and endorse you as his trusted successor. If you've never worked in this business, or have no reputation in it, you're going to have a major challenge in retaining the customers you've bought. Unless, of course, you want to strike it out on your own and build your own customer base. In that case, you're better off following the advice of others here and just try to buy out the capital assets rather than the business itself.
Jeff in Boston
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