buying or selling a business

Buying or Selling a Business

Looking to buy or sell a business? Regardless of whether you are the buyer or the seller, it can be a complex process for both parties.

Buying an existing Business

Buying an existing business can be less risky than starting from scratch. There are systems in place, the existing business is already generating sales and profits. There is goodwill, reputation, customers and employees who are familiar with the business. Buying an already established business could allow you to avoid an often painfully startup period.

Advantages of buying a Business include;

There should be an immediate cash flow
An established brand
Pre-existing relationships with suppliers
A market or demand for the product or service should have been demonstrated
Existing employees will have experience that you can draw on

This all comes at a cost, this is why it is more expensive to purchase an existing business, than to start one from scratch. Good trading history may make it easier to obtain finance as there is a likely hood that the business will continue to be successful.

On the flip side, significant changes may be necessary.

Disadvantages of buying a Business include;

Unreliable suppliers
Bad business reputation
Unproductive employees
Old and outdated equipment/improvements needed to equipment
Is there increasing competition?
Is the industry declining?
Is the sellers reason for selling the business genuine?

Selling a Business

The most common question a potential buyer will ask, “why are you selling your business?”

You need to fully understand the implications of selling your business, contact your accountant or lawyer.

What exactly are you selling?

Are you selling the whole business outright?
Are there any assets you do not want to sell?
Do you want to include any property that you might own and the business operates out of?
Are you looking to hold onto any intellectual property?

Valuing a Business

What is a Business worth?

There is no set valuation method to valuing a business. Different valuation approaches are used in different circumstances. They all have their strengths and weaknesses, all make assumptions about the future. Each is only as good as the assumptions and the quality of the data used to determine the valuation.

Generally there are three types of valuation approaches;

Income Based

In income approach of business valuation, a business is valued at the present value of its future earnings or cash flows. Future earnings/cash flows are determined by projecting the business’s earnings/cash flows and adjusting them for changes in growth rate, cost structure and taxes, etc. The present value is determined using a discount rate which reflects the required rate of return of the investor.

Market Based

The value of a business is determined by benchmarking it against the value of comparable organisations. The market-based approach looks at what similar businesses are worth. It involves three steps:

Identifying comparable assets and their market value.
Converting these to a standardised statistic (such as enterprise value (EV) divided by EBITDA), which becomes the valuation multiplier.
Applying the valuation multiplier to the assets being valued.

Cost Based

Cost-based valuations revolve around establishing appropriate balance sheet values for assets, and then deducting the market value of debt to determine equity.

This method generally looks at current market value of replacing assets.

Impacts on Valuation

The industry the business operates in
The size of the business
Key man risk, is the success of the business tied to 2 or 3 employees
Growth, businesses that can consistently show higher historical revenue growth in the industry/ or can show strong growth prospects can ask for a higher multiple
Recurring revenue, multi year customer contracts
Customer concentration, does 20% of revenue come from one client?
Profitability