How do you determine the real market value of a business you want to buy or sell?

What is the business worth?  If you are thinking about buying or selling a business, you must determine the market value of the business.  Normally, a business evaluator is hired to assess the value.  Some factors that go into evaluating business worth include:

• Annual sales
• Expected annual growth
• Operating profit
• Debts and liabilities
• Depreciation and amortization
• Cash flow analysis
• Inventory

In order to get a clear picture of the total business, more questions should be asked.  The answers may alter the financial outlook or illuminate procedures that will have to be completed in order for the new owner to run the business successfully.

• Are there any pending legal actions?
• Are all taxes paid and up to date?
• What are the aged receivables and payables?
• Are all financial records complete and up to date?
• What is the current lease agreement, and what are the terms for transfer?
• Are any facilities improvements currently in progress?  Will they be completed before the sale?
• Is an environmental assessment needed?
• What is the current age and condition of inventory, equipment, and computer systems?  What are the maintenance schedules that are in place, and are any major overhauls or replacements due soon?
• Will the seller agree to a non-compete clause for a period of years after the sale?
• What is the employee turnover rate?  Have key employees recently left the organization, and if so, why?
• What are the skills, techniques, and/or knowledge that differentiate this business from similar businesses?  Have they been built into the business systems, processes, and training programs?
• Are the key customers and contact information documented?  What agreements are currently in place, and when do those contracts end?
• Are the key suppliers and contact information documented?  What agreements are currently in place with suppliers, and when do those contracts end?
• Has a recent competitive analysis been conducted, and is the business’s market share increasing or shrinking?  Are any new competitors about to open in the area?

Understanding the business value, cash flow, outstanding issues, and future potential will help you assess whether the seller is asking a fair price, or help you determine a price for your business.  The SCWBC can help you understand the considerations for buying or selling and take a high level look at the business worth.  We can also help you find a business evaluation expert to assess the market value of the business when you’re ready to take that step.  Request a consultation with a business coach to get started.