Knowing how much to sell your business for or how much to pay to purchase a business is tricky.
What’s it worth?
Simply put, a business is worth what you can sell it for, or what somebody is willing to pay for it. Ultimately, the market will dictate the price. Factors include:
- Nature of the business
- How strong and reputable the business name is (goodwill)
- Past financial records
- Ongoing secure contracts
- Available purchasers
Look at the figures of recent sales of businesses that are similar to yours.
There are a number of valuation approaches. These include earnings of profit multiples, net asset and future earnings. An accountant or professional valuer can assist you with determining a valuation based on past financials of the business.
If your business is complex or large, you should consider engaging a professional business valuer.
It’s different for a small business
With smaller businesses, the valuation methods will need to be adjusted. The consistency and trend of profits and the stage of life of the business are all relevant factors.
Purchasing a business and cash payments
When buying a business, beware of sellers that suggest the accounts do not reflect the true earnings because of cash payments. Unless this claim can be substantiated, our advice is that you should not take cash payments into consideration. You could also consider requiring a trial period with minimum takings as a condition of the purchase of business to verify actual figures.
If you are purchasing a business, we strongly recommend that you seek legal advice before signing any contract or offer.
© Scott Legal 2020