Evaluating a Small Business for Sale

October 2, 2021

Are you considering buying a business? Be sure to strike the right deal.

Calculating the worth of a small privately-owned business that is for sale is much complicated than determining what value is a brand new home. One reason: Business owners have every reason to keep their profits in check during tax season and have a myriad of reasons to increase the value when it’s the time for selling. Here are some tips to evaluate a small-sized business to sell:

  1. Be aware of the prices that have been sold by similar businesses that were purchased within the last two years or so.
  2. Find out the most important factors that drive value for companies in the field you’re looking at. For example, if you’re looking to purchase bowling centers it is important to know that bowling leagues generate approximately 60 percent of the revenues for a typical bowling establishment. If the place you’ve been awestruck by is dependent on kids’ birthday celebrations, purchasing it is a risky option.
  3. Some commercial brokers are specialized in particular kinds of companies: some are only selling funeral homes, restaurants, or bowling alleys. An expert in the industry could be of assistance.
  4. Formulas that are based on rules of thumb will help you evaluate the value of an unproven business by calculating multiples of revenue, or “EBITDA” — earnings before taxes, interest amortization, depreciation, and taxes. Be wary of relying entirely on formulas, however, every company is unique.

Do your homework

For the property market, “comps” are recent houses that have comparable sales in the same location They provide an approximate worth of a home. When you’re evaluating a company look at what comparable companies have sold for as well as the standard “multiple” by which companies similar to it are judged. A multiple is something like “six times cash flow” or “two times revenue.”

U.S. Department of Labor’s search page for SICs or look up your NAICS code. Once you have the code of your industry, look it up in Pratt’s Stats database on private sales of private companies for multiples and comps.

Find a different method to sell small businesses in the emerging industries

For new businesses examine the age of the business. Does it have plenty of growth potential or does it have a steady flow of profit for the past few years?

Consider an industry-specific broker

A professional can provide what’s the “inside scoop” on industry developments and the drastic effects they have on the value of your business visit our website. They can also advise you the amount of money you’ll need to put aside the amount of money “down” varies by industry and is also based on whether a prospective owner is knowledgeable about the industry. Remember, however, that the broker is working on behalf of the seller.

Be aware of your demographics and the market for real estate and the business environment

If you’re buying a company that has a majority of its customers in the local area and you want to know all you can about your local area’s population.

Ask the sellers questions.

Apart from analyzing the numbers, it is also important to examine the company’s potential for growth as well as any challenges that – like lifestyle-related issues – you might encounter. To do this, talk to the owners in depth. Don’t simply inquire about the reason they’re selling, ask what hours they’ve worked each week and how long the new owner will need for success. Are they aware of any competitors are coming into the market? What do they think about the best way for a new owner to increase the size of their company?

Categories: Business.

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