What You Should Know When Buying a Company
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Safely Acquire an Existing Company Checklist
Here’s what you should know before purchasing an existing business.
For individuals interested in entrepreneurship, it may be a good idea to consider buying an existing business instead of launching one yourself.
Doing so would enable you to impact the trajectory of a company without having to take on the risks often associated with founding a business.
This is because, with an existing business, you already have an established customer base, team dynamic, and reputation to rely on. Additionally, you can avoid startup costs and growing pains that often accompany you when creating businesses from scratch.
However, acquiring an existing operation also presents the opportunity for you to implement changes that could promote growth for the business moving forward.
Buying a Business Checklist
Here are a few things you should keep in mind as you analyze an existing business that is up for sale.
- Analyze the value of the business you are considering.
Before making any offers, you should have a good idea of the business’s true economic worth. You and the seller can seek independent valuations, like those done at BA FL|GA|HI, to help you determine which appraisal service best suits your situation.
Regardless of the valuation method used by the appraiser, your valuation will determine the fair market price of the business. As a result, it will consider aspects of the company, like its financial health and longevity, its earnings history, and its growth potential. Additionally, its assets will be analyzed.
As a result, it is very important that you request projected financial statements from the current business owner. These documents will help the analyst better understand the business’s financial health and true economic value.
Read Buying a Small Business. What You Need to Know.
Methods to Value a Business
Appraisers often employ a few approaches to evaluate an existing small business and determine its fair market value. Those valuation methods include the following:
- Asset Approach: Although imperfect, this method determines the value of a business by taking the difference between the company’s assets and liabilities. Assets analyzed include physical items like machinery, property, and raw materials, and intangible items like intellectual property. Next, a monetary value will be assigned to each asset. Then each of the assets’ values will be summed before any debts or liabilities are subtracted.
- Market Approach: This approach helps determine the value of a business by considering the market prices of similar assets or businesses that have recently sold or are in the process of selling.
- Price-to-Earnings Ratio (P/E): This method informs forecasted growth through prior profits. Although calculations used to reach the valuation are straightforward, the P/E ratio often varies from business to business. Expert valuators like those at BA FL|GA|HI can suggest the correct number to use for the business’ P/E ratio.
Expert valuators use this method to inform forecasted return growth through prior profits. A higher P/E ratio would be used for companies with high forecasted return growth or repeat earnings. For example, if the P/E ratio of three is used for a company that makes $500,000 in post-tax earnings, the enterprise would be valued at $1,500,000.
2. Determine whether the asking price is fair.
Keep in mind that selling a business for an individual often involves various emotions. As a result, the business owner as the seller might have an idea of what the business is worth that differs from what you, as the potential buyer, have in mind.
It is important to note that many business owners might be setting the sale price of their business randomly based on anticipated value and not facts. Additionally, the price might be influenced by external conditions like the state of the economy or personal financial issues.
Therefore you, as the buyer, must closely assess the asking price. Being the most prepared party will enable you to have leverage as you enter the negotiating stage.
4. Review all the business’ liabilities.
Although acquiring a business may help you avoid risks with starting a
business, you should still consider the potential costs you would be acquiring with the purchase.
This is why it is important to consult legal and financial experts, like attorneys and accountants, who can help you examine all liabilities that accompany the enterprise.
It is vital that they consider whether the owner had used any assets as collateral to secure loans, if any liens had been imposed against any assets, or if claims have been filed against the business.
This sort of information does not necessarily mean you should fail to consider moving forward with the sale. Instead, use this insight to have a clear understanding of what the purchase might actually entail.
Many people consider franchises because of the systems and procedures in place. Read our article about knowing the value when buying a franchise.
Buy a Business Conclusion:
Purchasing a business helps you avoid the costs associated with launching a business. But buying a business also imposes its own set of risks and challenges.
Understanding a company’s true value and worth can be extremely helpful as you strategize and consider moving forward with a potential purchase. Reach out to our appraisers at BA FL|GA|HI as you consider whether a business is the right step for you.
Here is our checklist when valuing a company.