How much should you buy a business for is a question that is on the mind of many people looking to buy a business.
There is no easy answer to this question, but the thought I would like you to be left with from this article is ‘A business is only worth what someone is prepared to pay for it!’
There are many ways to value a business and the value is dependent upon a number of factors, which include the following:
- How profitable the business is – usually, a business which is not valued based upon assets (like a property based business), is valued based upon a multiple of profits.
- How dependent is the business on the owner(s) of the business? The more dependent, the lower the value, for example a self employed plumber or electrician business will be worth less than a business that employs a number of plumbers or electricians, where the owner manages the business and does not get involved in the dirty work, as it were.
- Does the business have one or more significant customers representing more that 10% of the sales? Be careful if you are looking to buy a business which is too reliant on few customers, as if these customers are lost, the business will be in trouble.
- Is the business in a niche market or has the business got a unique product where the entry to the market is difficult – this could represent a premium to the value if this is the case.
- How long has the business been operating? If it has been going for 5+ years then the business will have gone through the ‘difficult’ opening years and is more likely to survive going forward.
Another question to ask, which is relevant to point 1. above, is ‘should i buy a business that is losing money?’ This is a depends and it depends upon why the business is making a loss and how much capital will it need to turn it around, which you will need to take into account when you are putting together your purchase offer. Of course, a business that is making a loss will not be worth a huge amount, however, I have come across business owners selling a loss-making business for silly money!
Make sure you go into buying a loss-making business with your eyes wide open and prepare a business plan along with cash flow forecasts to work out what finance is need to turn the business around. However, you may well feel that you could turn the business around and might have spotted something the current owner has not. You could utilise ‘Increase Profit‘ or ‘Profit Improvement’ techniques, which don’t cost huge amounts to implement and improve marketing and turn the business around without a huge investment.
In order to work out how much you should buy a business for, consider the above points and look at the business you are buying. Work out in your own mind how quickly you want to get pay back on your investment. Another consideration is finance and how much finance you could achieve for what you are buying the business for. Always consider vendor finance too when you consider how much you should pay for a business, as this may help your own situation if you have limited resources, but you might have to pay a little bit more for the business, but over an extended period of time.
Other questions that come to mind are ‘how much does it cost to buy a business?’ and again this will vary depending upon the size of business you are buying. Also, if you are buying the shares of a limited company, usually the legal fees are higher, as you are taking on all the potential problems hidden in the past of the business you are buying – for example, if the present owners have made errors in their tax affairs, if you buy the limited company, you will be taking these on. However, you can get the owners to indemnify you against these type of potential liabilities.
A question to ponder and a future article is ‘should i buy a business or start one?’ There are pros and cons for each and I have done both and would do both again.
As always thank you for taking the time to read my blog and if you like what you’ve read, please share it with others.