Posted 11-10-2008 5:16 pm by
Are you planning to purchase a business? If so, it is important for you to understand how to determine a fair price for the business you want to purchase. The reality is that you and the seller will each have an idea of how much the business is worth.
Are you planning to purchase a business? If so, it is important for you to understand how to determine a fair price for the business you want to purchase. The reality is that you and the seller will each have an idea of how much the business is worth. Therefore, you will need to negotiate in order to determine a price that you can both agree upon. The better prepared you come to the negotiation table, the more likely you will be able to get the price you think is fair for the business you are purchasing.
Using Multipliers to Determine the Value
One method used to determine the value of a business is to use a multiplier of the monthly gross sales of the business, of the after-tax profits or of the monthly gross sales plus inventory. The figure that is multiplied to the profits is generally determined by industry standards. While the multiplier method can give you a ballpark figure of what you should pay for a business, it should not be considered to be the final word when determining the value of the business.
Determining the Book Value to Decide on Your Price
Using the book value to determine the price you pay is a fairly accurate method. This is because a price is determined by simply comparing the assets of the company to its liabilities. By multiplying this figure by one or by two, you can calculate the book value of the business. This can be a little more difficult than it sounds, however, as the fixed assets of a business are often listed by their depreciated value rather than their replacement value. As a result, it is not a true representation of the costs of the fixed assets.
Considering the Return on Investment When Determining a Price
Taking a look at the return on investment, or ROI, is the most common method used when determining the price of a business. The ROI is the amount of profit you should make on the business after paying the taxes and debt services. In general, a small business should have an ROI of 15 to 30 percent. Therefore, you should determine the price based on whether or not the business can pay for itself as well as provide an ROI of at least 15 percent.
Placing Value on a Business Based on Capitalized Earnings
Determining the vale of a business based upon its capitalized earnings is very similar to using the ROI method, but normal earnings are used to estimate the projected earnings when using the capitalized earnings method. By dividing the estimated projected earnings by the standard capitalization rate, you can determine the value of the business. In general, the capitalization rate for a small business will be 20 to 40 percent. Therefore, when using this method, you will multiply the projected earnings times this capitalization rate in order to determine the price of the business.
When it comes down to it, you are trying to find a price that is fair for both you and the seller. Therefore, you should use these methods to help give you a good idea of how much the business is worth and then take the negotiations from there until you find a price that you can both be happy with.
AARON MULLER| ADVANTAGE COMMERCIAL BROKERS
BUSINESS BROKER, COMMERCIAL PROPERTY SPECIALIST
DIRECT: 425.766.3940
FAX: 425.882.2547
CHECK OUT MY LISTINGS AT www.acbrokersinc.com
