How Much Should I Pay for a Business?
How much should I pay for a business I want to buy? The starting point for a business owner that wants to sell their business should be a business valuation. The same reasons and more apply to someone that wants to buy a business.
Doing a business valuation helps the buyer at many levels. These include helping the buyer be clear about what is and isn’t part of the purchase. I recently helped a doctor that wanted to buy a medical practice. The seller had two locations and said some of the medical equipment the buyer saw when he came to visit the practice was not part of the sale as it came from another practice that was now closed down. I then looked through the financial statements and saw income from a piece of equipment the seller said wasn’t used in the practice but the financial statement showed it was generating income to the seller so that piece of equipment was part of the sale or the buyer was walking.
There are many other reasons. Here’s a quick summary of them.
- As a broker representing the buyer in the sale, by putting a valuation together it allows me to see the see the financial statements, discuss these with the seller and then bring the details back to the buyer. If these financial statements do not present well then that can be reason for the buyer to stop wasting their time and look for another opportunity.
- Another reason to get a valuation is because the buyer may need to get an SBA loan. The initial valuation I put together for a buyer does not meet the standards for an SBA loan but it’s much cheaper, quicker and what I put together can be used to create a certified report to meet the SBA requirements. If the buyer can get an understanding very early in the process about the business and its suitability for an SBA loan, it will help the buyer save time and avoid wasting a lot of money.
- If the buyer asks the seller to let them do a valuation, it tells the seller the buyer is serious. It also tells the seller that the buyer is not willing to overpay for the business. If the seller starts to object or isn’t willing to allow the buyer to move forward and get a valuation, it then it helps the buyer move on and look for another opportunity.
- Often a seller is reluctant to let the buyer look at their tax returns and other financial statements until they make a written offer. A business valuation can only be done by looking at the tax returns, profit and loss statements and balance sheet. The quality of these documents also reflect on the quality of the business. All this enables the buyer to get a feel for the quality of the business they are buying early in the process and before they emotionally quit to making that purchase.
- Putting together a business valuation will allow the due diligence process to flow much smoother and be done so much quicker as the buyer will have a clearer road map of the business.
- A business valuation allows the buyer to get much deeper much quicker into the process to buy a business. If there are other buyers looking to buy the business the buyer doesn’t want to feel as though they are competing against others. If they can collect and process much deeper data on the business and then ask deeper questions of the seller it all works to help them achieve their ultimate goal of buying a business.
- A business valuation can allow the buyer to do an analysis to see how this business performs against the same type of business in the same industry.
A business valuation can be a great aide to helping a business buyer get where they want so much quicker. Selling a business is complicated. Buying a business is more complicated as the seller has knowledge and history on his side whereas the buyer has to get up to speed on everything. At its simplest level, a business valuation helps the buyer manage his risk…and that’s good business.
If you would like more information about buying a business please visit my webpage Buy a business or buy a copy of my book Successfully buy your business. If you would like more immediate help with buying a business you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.