Buying A Business

Q: I want to purchase a small business. How do I know how much it’s worth?

A: Valuing a small business can be quite a challenge. Having an appraisal done will give you the most accurate estimate of the value. But, most small-business buyers find this process far too expensive.

Without an impartial appraisal, you’ll need to investigate and evaluate the business.

Obtain tax returns, balance sheets and other financial documents. Also get copies of any ongoing loans, contracts or leases. Ask your tax or financial advisor to review these documents with you.

If the business owns significant assets such as equipment or buildings, determine the condition of those assets and how soon they will need to be replaced. This will give you a feel for the hard assets that are to be purchased.
Next evaluate the cash flow of the business. Look at sales, revenues, expenses and profits. Again, enlist the help of your financial advisor.

Finally, look at the intangible assets. This is known as “goodwill.” Does the company have a stellar reputation in the community? Does it have a solid base of loyal customers?

All of these evaluations should give you an idea of the value of the assets that are being purchased and the value of the goodwill.

As you can see, there is no simple way to value a business. It’s as much art as science.