Or how do you know how much the business is worth? Let’s dive deeper into these questions and explore what factors affect the company’s price.
So, you’ve identified a business of interest for potential acquisition and are prepared to submit an initial offer. Determining the right offer price is crucial; therefore, it is essential to understand how the business is valued.
The valuation process
There are many methods to determine the current worth of a business. Most processes include reviewing financial statements, discounting cash flow models, and similar company comparisons. Understanding how a business is valued will help you determine an estimated offer price.
Significant factors to a business’s value
Below are some important factors to keep in mind that contribute to a business’s value.
Market conditions can often impact the value of a business. Like the real estate market, the value can go up or down purely based on what the market is doing. To understand what the market is doing, look at reports such as this BizBuySell insight report or chat with a CPA.
The valuation process will also look at similar businesses in the same industry to get an idea of what they sold for or an estimated price. While every business is different, with various factors to consider, getting a rough estimate of the competitors’ value is a good place to start.
A business’s reputation adds value by building customer trust and loyalty, allowing for premium pricing, and attracting top talent and partners. It also builds investor confidence and resilience during crises, contributing to long-term viability and brand equity. A strong reputation ultimately impacts a company’s financial performance and competitiveness.
The number of assets a business has predominantly affects its value. Items to focus on outside physical assets would-be customers, revenue health, growth potential, and support specific to the company, like machinery. Take this into consideration when looking at buying a business.
Reason for selling
The motivations behind selling a business can have an impact on its valuation. For example, a forced sale is likely to decrease the value. A business owner forced to sell the company due to ill health or other personal reasons may have to accept the first offer.
Comparing sale prices of similar businesses
Gaining insight into what prices other businesses in the same industry have sold for can give you a good indication of the company’s value. However, it’s important to remember that every business is different, so take the firm’s price carefully.
So, what is a reasonable price for buying a business? As explored above, all companies have their value for various reasons. Every sale price is subjective, varying from buyer to buyer and seller to seller. Considering the above and exploring these areas in more detail (with the help of a qualified CPA) before making an offer will give you a solid indication of what you should be offering as a purchase price.
If you’re considering buying a business, learn more about how we can help.