5 EASY STEPS TO BUYING A BUSINESS
STEP 2 – UNDERSTANDING THE VALUE OF THE BUSINESS
There are four key aspects to a business that you pay for:
- The tangible assets such as plant & equipment.
The plant includes shop fittings, office equipment, computers, machinery and sometimes includes
- The stock or saleable inventory of the business.
This stock has been paid for by the Seller and he/she is reimbursed by you (the Buyer) at settlement for that cost. You then own the stock and can upsell it to the customers for a profit margin.
- Intangible assets
This may include intellectual property such as patents, trademarks, operating systems, designs/drawings/logos, recipes and formulae.
Goodwill is the expectation that the customers will continue to patronise the business, regardless of who owns it. Goodwill is a consequence of profits and the level of goodwill is determined in part by the consistency and level of those profits. The total purchase price of the business is made up of those four components. Effectively, the plant equipment, stock, intellectual property and the use of those assets by the owner of a business result in customers liking and patronising the business. This patronage results in the business being profitable.
HOW A BUSINESS IS VALUED
The profit of a business is “valued by the marketplace” on a yield on the purchase price or a multiple of profits. The most common way this is expressed is as a Return on Funds Invested. That is: the profit divided by the total price and multiplied by one hundred per cent.
THE STABILITY OF PROFITS
The stability of profits is an indication of the likelihood of earnings continuing after you have assumed ownership.
Essentially, a business is worth what the market will pay for it, but as basic guideline, value usually relates to expected returns as well as the level of security. The price is usually based on a multiple of earnings. For instance, a business regarded as “very safe” may fetch a high multiple of earnings while “less safe” businesses may sell for a lower multiple of earnings.
The role of our brokers is to explain this in full to you – so do feel welcome to ask questions as you must have a full understanding of what you’re paying for and a good appreciation of the business’s value. When you can see yourself in the business and have a good understanding of its value in the marketplace, you’re ready to make a conditional offer. Of course, you will not yet have every building block of information about the business yet, so we will help you prepare a Conditional Offer which is “subject to” certain pre-conditions being satisfied by thorough Due Diligence before you are totally committed to the purchase.