Buying A Business Agreeing a Price
Agreeing a price can be the most difficult and emotive part of buying a business. You should try to find out as much as you can about the business at the very start of the process. Seek out the historical information in terms of the Profit & Loss achieved for the previous 2 years plus the current year to date. The business is worth what it is worth to you and once the objective calculation is done, the subjective aspects also come into play.
Dealing with and negotiating the issue of price should not be underestimated. Seek out the help of your accountant or advisor as their approach will be unemotional. However, you also need to balance this with what you truly feel about the business and working in the industry plus what buying the business could do for you - both positively and negatively - in terms of lifestyle.
The price has to be mutually acceptable and both parties must feel that they have achieved their goal. A one sided offer is not a route to take. The conditions attached to an offer also play a major part in the vendors decision whether or not to accept.
What Price would you consder paying for Potential?
Just how much value in dollar terms do you place on the potential of a business?
Generally the opinion is ... very little. All businesses have some future potential under the right management but are you the right person to realise that potential? Using a S.W.O.T. analysis (Strengths, Weaknesses, Opportunities and Threats) on yourself can be a useful tool to establish if you will be good for your future business.
Of course the same test should be used on the business you are considering buying. A business is not like a house. It’s difficult to turn a $100,000 house into a $10,000 house. However, turning a $100,000 business into $0 business can be surprisingly easy! It’s not possible to guarantee that the business you buy today will still be worth the same or even more in 12 months time.
Business value using Return on Investment (ROI)
Return on investment is the time it takes to recoup the money spent. If it takes 2 years you are effectively getting a 50% annual return on your investment. ROI is the yardstick used to determine the price of a business.
Business Brokers are actively appraising and selling businesses and they usually use the objective measurement of ROI to reach an asking price. This is calculated on the adjusted net profit of the business divided by the total purchase price. For example a business that has an adjusted net profit of $100,000 and the current accepted ROI range is 30%-50%. At 30% it would take 3.3 years to recoup your purchase cost, at 50% it would take 2 years. Calculate the ROI as follows:-
Adjusted Net
$100,000 x 100 = 30% (3.3 Years)
$100,000 x 100 = 50% (2 Years)
Price
$333,000
$200,000
The total purchase price for this business including Goodwill, Plant & Equipment and Stock is between $200,000 and $333,000.
Many factors influence where a business actually fits in this scale. These can include location, number of years established, length of lease, owner involvement, staff, contracts, competition etc.
As a rule, the stronger the business type, the lower the Return on Investment.
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