Never Buy a Business without Knowing Which Valuation Method Was Used
Even if you are happy with the asking price that the owner of a business is suggesting, it is still a good idea to find out which business valuation method was used to determine the selling price. In order to establish the true worth of your investment, your business broker will ask questions such as:
· How did the seller determine the selling price?
· What method was followed for the business valuation?
· Did the seller perform an internal business valuation or was it an external appraisal?
· Is there an appraisal report available?
· What is the goodwill on the selling price?
· How did the seller determine the goodwill?
· Is the price negotiable?
· How is the business sale structured in terms of business interest, shares, assets, inventory, customer and supplier lists, intellectual property rights, contracts, and memberships?
The business valuation method is important. You want to know whether the valuation was based on profits, owner benefits, years in operation, turnover, or a combination. Of course, a business that has been in operation for more than three years has proven to be more stable than one only in operation for a year.
However, even if the business has been in operation for five or more years, your broker would not recommend a business that is owner dependent to operate well. This means that the business profits and success must not be closely linked to the particular owner’s skills and good name. If so, the business valuation needs to be adjusted to consider this particular risk. The business must be able to generate the same and more revenue if you take it over.
The true benefit of an external business valuation is that it is all about the numbers. The priority of any business is profitability. The valuation enables you to see whether the business is priced correctly. At Aldes Business Brokers, our team would never recommend that you buy an unprofitable business unless you have a way to turn the operations around.
You should also speak to your business broker about the structuring of the sale, as this will have certain legal and tax implications.
Make use of our business brokering expertise to help with business valuations, whether you want to buy or sell a business in South Africa. We will be able to explain to you exactly which type of business valuations we use and how this affects the selling price of a business.