Important considerations when buying an existing business

How much is the business worth?

Valuing a business can be one of the most difficult and worrying aspects of buying an existing business.

To get a general idea of how healthy the business is, it is advisable to consider the following:

  • the history of the business
  • its current performance – sales, turnover, profit
  • its financial situation – cash flow, debts, expenses, assets
  • why the business is being sold.

It is also advisable to speak to the vendor and the business’ existing customers and suppliers. They may be able to give you information that affects your valuation. They may also be able to give you general market information about conditions affecting the business.

For example, if the vendor is being forced to sell due to decreasing profits, your valuation will be lower.

The most difficult part is valuing the intangible assets. These are usually difficult to quantify and may include:

  • the company’s reputation
  • the relationship with suppliers
  • the value of goodwill
  • the value of licences
  • patents or intellectual property

You should consider how the value of these assets could be affected if you decide to buy the business.

The list below details other considerations that will affect the value:

  • stock
  • assets
  • products
  • debtors
  • creditors
  • suppliers
  • employees
  • premises
  • competition

Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy the business at all. If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.

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