There is probably no part of the buying process that worries a potential buyer more than overpaying for a business. This is understandable. Who wants to pay more than something is worth? However, it has more to do with lack of information provided by s and other opposition business brokers than being an expert at business valuations.
The Truth is, Value is Completely Subjective.
After all, what one business is worth to you is entirely different from what it is worth to the next person. While there are cases where people may not pay the best price for a good business, you must be aware that no price is cheap enough if you buy the wrong business. In time, a good business will always justify the purchase price whereas a bad one may never allow you to recover financially.
In a nutshell, value must be measured by what you are getting in return for your money. You have to equate the purchase price against the benefits you will derive over the term in which you can realistically expect to own the business. A good business will provide abundant rewards for you so in order for you to truly measure a business' value you have to consider all of the benefits that you stand to gain. Also, you must factor in what you could never have achieved if you hadn’t gone into business for yourself.
Think of it this way: The average person takes about 30 years to pay off a mortgage; five years to pay for a car which will most likely be worth less than 30% of its original value by the time it’s paid for. Neither one of these acquisitions will pay you a salary.
While they both have their benefits, neither one comes close to what you can derive from a good business as far as overall benefits such as capital growth and profit are concerned.
For most business a formula is used that combines the company's profits, owner benefits, non-recurring and non-related business expenses. The adjusted net profit is applied to a multiplying factor (ROI) to this number to establish a purchase price.
This is the method that is most commonly used and is accepted by the vast majority of accounting, banking and legal fraternities. A general understanding of accounting principles is required to make this calculation. The multiples that are used are generally based upon what other similar businesses have sold for, but as a very general rule it is usually one to three times of the adjusted net profit after adding back non- business related and non-recurring expenses.
If your intentions are to find a cheap business, you must be prepared to never find one or to deal with one that may never turn into what you had hoped for. It's akin to buying a cheap used car versus a good used car that you have checked over extensively.
Yes, there is a chance that you will get lucky and get one that runs relatively trouble free for a long time, but the odds are that you will get one that requires ongoing maintenance. Now, this may be fine for your basic transportation needs but if you need a vehicle to work as a sales rep on the road where downtime means lost revenue, then you would want a vehicle that is highly reliable wouldn't you? The same applies for a business; there is far too much at stake to buy something just because it's cheap or affordable.
Unless you are a ‘business mechanic’ you will probably spend so much time fixing it that you won't have time to run it. If you want to dramatically improve your chances of business success, then look for a good business that can become great. The key to pinpointing your perfect business is to find – and put your trust in – a qualified, experienced and respected business broker. By choosing Performance Business Sales you will be in the hands of one of Australia’s most successful and innovative business brokers. The only one with Personalised Business Search ®. There is simply no faster, easier, more financially rewarding way to buy a business. Don’t miss this unique opportunity to become your own boss. Call us now to set in motion the process that will change your life.