Considering Buying or Selling a Business?
Few business decisions are more important, complex and potentially business altering than a buy or sell decision. When you are ready to sell your business, we can provide support at every step, including valuing the business, vetting potential buyers, and supporting due diligence. If a buying opportunity presents itself, we can help by providing valuation services, developing negotiation and financing strategies, and managing the due diligence process.
The SBA (U.S. Small Business Administration) always has great information and tips about running a business in general. Here are some of their tips in what to consider when selling a business and buying a business:
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business. Here are a few:
- Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
- Excess Earning Method: Similar to the capitalized earning method, except that it separates return on assets from other earnings.
- Cash Flow Method: This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm's ability to service debt.
- Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
- Value of Specific Intangible Assets Method: This method compares buying a wanted intangible asset versus creating it.
Doing Research for Purchasing a Business
Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation. The following list includes important information you want to include when researching the business you want to buy.
Letter of Intent: The letter of intent should spell out the proposed price, the terms of the purchase and the conditions for the sale of the business.
Confidentiality Agreement: A confidentiality agreement indicates that you will not use the information about the seller's business for any purpose other than making the decision to buy it.
Contracts and Leases: If the business has a current lease for the location, be aware that you may have to work with the landlord to assume any existing lease on the business premises or negotiate a new lease.
Financial Statements: Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not accept a simple financial review by the business itself.
Tax Returns: Review the business's tax returns from the past three to five years. This will help you determine the profitability of the business as well as any outstanding tax liability.
Important Documents: Numerous documents should be checked during your investigation. Examples include property documents, customer lists, sales records, advertising materials, employee and manager information and contracts.
Professional Help: A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.
Visit our Calculators page with a variety of tools to help you get instant calculations.
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