A first-time business buyer may have a set price in mind that he or she would like to pay for an acquisition, but may not know just how much to pay for a business that will result in a sound deal without breaking the bank. While a professional valuation may be a good starting point, there are a variety of other factors that should go into deciding how much to pay for a business.
Since such an array of different valuation methods exist for finding the worth of a business, it is important for the buyer to understand the valuator’s manner of calculating the worth of the company. A single appraisal number may not show the true value of the business. Learn more here.
Aside from looking at the financials, another important factor when determining how much to pay for a business is the amount of risk involved. Has this company seen steady growth over the years, or is it a newer venture without a proven track record? Does the product or service have recurring revenues, or is it merely a passing fad? It is vital for the buyer to analyze the amount of risk involved in the transaction when selecting how much to pay for a business.
If the buyer determines that there is a significant amount of uncertainty, it may be beneficial to introduce the idea of seller financing. In seller financing, the buyer only pays the full sale price once certain stipulations have been met, which cuts down on a lot of risk.
Another way to eliminate risk is through performing thorough due diligence. Due diligence should reveal any poorly kept financial records or skeletons in the closet that may affect the worth of the business.
It is also important to consider the future, rather than simply the past and present data of the company. Will the value change once the business has sold? Will key staff members leave or will equipment need to be replaced? What are the tax implications of the business sale? Be wary of post-closing expenses and be sure to factor them in when deciding how much to pay for a business.
A buyer’s ability to finance the deal can also affect the asking price. Should the buyer offer to pay the entire sale price up front, in cash, a sizeable discount can typically be achieved. However, with seller financing, the overall payout might end up costing more—yet this is the least risky financing method when buying a business.
If you would like more information on determining how much to pay for a business, we would love for you to contact us to learn more about our buyer representation services. The professionals at George & Company work with buyers looking to purchase a Main Street business, while the intermediaries will assist those looking to buy a mid-market company.