Dear M & M: I am considering buying an existing business. How do I go about determining the value of it? – Dan
Dear Dan: Bottom line, what are you willing to pay and what is the seller is willing to take will determine the selling price?
Before you start evaluating what this business is worth do these two things. First, price out what your would have to spend if you opened a similar business. The next thing to consider: Could you spend the same amount of money on something else and make more money than you would buying and running the business you are considering to purchase?
There are some other considerations that are sometimes hard to put a dollar valuation on. Here are some things not listed on the company balance sheet that are very important to consider in the valuation: location, trained employees, great reputation, customers already doing business with you.
Vendors, suppliers, inventory, fixtures all have good and bad elements to them. Are the fixtures old and falling apart, is the equipment outdated, is the inventory 10 years old and outdated?
What does their website look like? Do they have an online presence? Are they appearing on a Google search?
What do the third-party reviews look like? What and who is the competition?
The next thing you need to do it to work on a cash flow spreadsheet and determine your business expenses in conjunction with forecasted sales and see how much money your can generate. Remember, the previous owner’s business expenses might not be the same as yours. The track record of the business you are going to buy is important. Are sales declining? Is new competition coming to town that might be bigger or better?
Always make sure you ask if the owner is interested in financing the sale. Never give up all your cash in a down payment. Consider you pay $70,000 as a down payment and the business generates $70,000 a year income for yourself after all expenses. That’s like getting 100% return on your investment.
I hope you enjoy whatever it is that this new business does because you will be spending a lot of time in it after the sale.
ASK M&M is prepared and submitted by Mark Schmitt, director of the Small Business Development Center at Cochise College; and Mignonne Hollis, executive director at the Arizona Economic Development Foundation. To ask your questions: Call the Small Business Development Center (SBDC) at Cochise College (520) 515-5478 or email email@example.com or contact the Arizona Regional’ Economic Development Foundation at (520) 458-6948 or email firstname.lastname@example.org; www.aredf.org.