There are many things to consider before buying a business to be sure that it’s right for you or not.
The process of buying a business can be an intimidating task that might take months of checking, calculating, negotiating, and finally documenting.
But with the help of the advisory team and careful planning, it can be a fruitful process ending up in buying a successful business.
Here we would be discussing some tips that will help you in buying a business that will prevent you from heading in the wrong direction.
In this article, we will be discussing:
- Buying an existing business pros
- Buying an existing business Cons
- When buying a business, there are three categories of buyers:
- Why do you need to know what the worth of the business is?
- Top 7 points for calculating the value
Let me break it down further. What are the pros and cons of buying an existing business
Buying an existing business pros
- Much of the legwork needed to jump-start has already been done
- A built-in track record which makes it easier for getting financing
- Reduces time and cost associated with building a new startup
- Shorter waiting time for generating profits
- Suppliers are already connected
- The product or service is already market tested
- The customer base is already in place
- Employees are already running the business
- Knowledge transfer from the existing owner
- Existing goodwill could be associated
Buying an existing business Potential Cons
- Some companies might be having a bad reputation in the market, so it will be hard to regain trust
- The premises might be very small for future developments
- The lease agreements with the landlord might be an issue
- You might have to make significant changes like firing and hiring new staff
- It could be costly when compared to a new startup
- Equipment and inventories may be outdated
- Relation with the suppliers or vendors could be in a bad shape
- The building could be too old and require renovation
- Seller may present a puffed up estimate of business worth
- Some receivables might be non-collectible
When buying a business, there are three categories of buyers:
- Strategic buyers: buy companies that they can leverage for strategy reasons
- Value buyers: interested in buying companies at a discount to fair value
- Targeted buyers: are those prospects looking for a business in a specific niche
A wise businessman knows that the search for finding a private business takes diligence, patience, a professional advisory team, and street smarts. Still, in the end, smartness is in extracting the value from the companies that they buy.
Things to consider about valuing businesses
- It helps to calculate a business worth to set a potential offer
- Well documented financial statements and tax returns are essential to demonstrate the company’s earnings strength
- It makes it easier to have an update-to-date record for legal proceedings such as audit investigation, Government agencies, and divorce
- If you are planning for expansion in the future, it will make it easier to get the financing from lenders and financial organizations
- When progressing on a life insurance policy, an up to date business valuation is vital for agreements as insurance companies will pay your family or the estate according to the share of your business value.
- If you are looking to take an exit strategy no matter what you choose (MBO, IPO, or merger/acquisition, etc.), it will help you choose wisely.
- Valuation is knowing the true value of the business and measuring the earnings before interest and taxes. Therefore it’s a roadmap for future developments in your business.
Let me further show you the guidelines for calculating the value.
Additional points for calculating the value of a business
- Tally the value of assets on a balance sheet which includes all the equipment’s and inventories and subtract liabilities to show you the net assets
- Check out the revenue the business generates through annual sales and compare it with similar companies in the same industry.
- Calculate through forwarding price to earnings (forward P/E). This is done by the current share price divided by estimated future earnings per share; the result would show you the current P/E ratio of the company
- Go through a discounted cash flow analysis through online net present value calculators. It will show you the current cash flow through future projections.
- Calculate the present value of the annuity to measure the investment risk through online calculators such as (meracalculator, calculators.tech or mycalculators, etc.)
- Don’t just stick to the figures on the financial sheets, also check out the technological factors the company is currently using as it can affect positively or negatively towards your decision.
- Research through a market-based approach involves comparing with the similar private or public companies pricing multiples to measure the current performance of the business, but the challenge is to rightly compare “oranges with oranges.”
On top of it, you need to get an advisory team to evaluate the accurate information in a timely manner; after all, it might be the savings of your life, so even a slight mistake or misinterpret can have you paying a high price above the market value of the business. Hopefully, this article has provided you with some useful information on buying a business.
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