Value your business before buying and selling

As essential it is to increase the value of one’s business while running it, estimating the same while selling it off is indispensible. The p...

  • Value your business before buying and selling
    Paul O'brien Image Paul O'brien

    Value your business before buying and selling

    As essential it is to increase the value of one’s business while running it, estimating the same while selling it off is indispensible. The parties involved, buyer and seller are both required to know, understand, calculate and account for all the aspects of business buying and selling fully.

    Law governs the process of buying and selling businesses. It suggests the parties to bring in consideration a plethora of legal factors while dealing with its business as an individual entity and the other party. Not gaining adequate knowledge or not abiding by the law can prove to be troublesome, legally and financially.

    The value of business is generally calculated in four major arenas, namely, Goodwill, Premises, Assets and Stock. These aspects need to be studied and evaluated completely to assess the value of the business while selling it. The seller must follow this to ask for a good profitable value from the buyer and for the buyer this is important for judging the fairness of the price asked.

    • Goodwill is the reputation of the business calculated in monetary terms. It is the fame of the name of a business in the market. There are several components of goodwill like reputation, business, product and services, client base, contact details etc. While buying a business, it is suggested to the buyer to determine what these components are worth and whether they are already registered. If the parties find any difficulty in valuing the goodwill of a business, they must seek professional help from outside, may be it a broker or lawyer.

    Also, a disclosure of information must be followed to avoid breach of the Privacy Policies.

    • A premise of a business is acquired through a legal process of purchase or lease as a permission to use it. When you plan to buy the business you must know if the premise is on lease or the seller’s personal property or property in the name of the business. Thereafter, you can seek permission to use it or own it accordingly. It is important to know if you are required to buy it, only pay for it or get the lease transferred in your name or enter into a new lease. A purchaser should also request copies of relevant permits.

    • Assets, Plant and Equipment/Machinery. While buying a business you buy all its assets, liquid and fixed, machinery and equipment. Thus, there is a need to know the value of all the assets of the business before selling it to realize their cost. The kinds of assets owned by a business depend on its nature, scale of operations and technology. A buyer should be diligent enough to ascertain afore mentioned aspects and estimate the price of the assets. Balance sheets of the companies usually reflect all appreciation and depreciation of assets of a business. Buyer(s) should study them well.

    The seller must prepare a list of excluded assets and also make sure that the assets he is valuing are all in good working condition and mention the warranties, if any, to the buyer.

    • Stock in trade includes all commodities used in the production of goods, goods being produced and finished goods. A seller must estimate a fair value of the stock keeping in mind the waste. Inventory purchased, used, left and obsolete, expired or soiled must also be mentioned in the contract. However, a purchaser should calculate the accurate value of the stock.

    The seller must include their client database and whether or not this will be included in the sale of the business. The larger the client database who are currently using the business, the higher the worth of the business.

    • Client Database is usually in the a customer Relationship Management (CRM) system which contains important information about the clients like their contact details, record of sales and details of current contact over the phone and e-mail with them. If this is not transferred with the sale of the business it can potentially lead to the business owner starting up a competing business against you with all of your clients. This would reduce the value of the business. (Duty of Care)

    A buyer must ensure all the areas mentioned above are catered to. He must not just rely on papers for the value of the business. There are ways by which he can ensure the price he is paying for the business is fair and would be profitable for him in future.

    Further methods in which the business can be valued further-

    1. Buyer can visit the premises and undertake a good research and survey of market value of the premises and the business trend. This would also help gain financial support if needed to own the premises or the permission to use it.
    2. The plant and machinery and other tools used for the business activities must be physically checked. You can ask the labourers for their true condition, problems involved, repair and technology used. This will also help you to decide what you would want to keep or what to change after buying the business.
    3. An extensive research of the market and the value of the business and its elements in the market is a must.
    4. Business brokers are of great help to fresh buyers and sellers. They help one cater to all popularly neglected smaller issues. They also make sure that all legal aspects are fully acknowledged.
    5. Negotiations are a must in any deal. A healthy negotiation to come to the best deal where both the parties are duly satisfied is a predicament for a good business deal, even if it involves paying a broker a rational commission for his help.

    The value of the business is thus ascertained through various angles. As accurately measured the value, so is the understanding of the owner(s) of the business and as profitable as their operations.

    2 different methods of valuing a business are included in the following link- Business.gov.au- Valuing a Business.

    The value of your business is actually your value in the market as its owner. The determined value can be used when selling your business or when looking for investors. As you work on improving your business and helping it to grow you will see the value of your business grow with in leaps and bounds.