16 Nov
Why do I need a valuation if I am buying a business?
Posted in General valuation topics, Uncategorized on 16.11.09
The straight answer is you may not. Unless the transaction is between family members or will be financed with an SBA loan, a valuation is usually not required.
The advantage to a business valuation is it provides the user with the value of a business or interest in that business. The advantage to a business valuation is also the major limitation. The business appraiser will usually provide a single value, based either on fair market value or investment value. (See blog post here)
Value is a range, though, and there are many different types of value within that range. As a buyer, you are only concerned with the lowest value within that range that you can pay. If you can negotiate a lower price than fair market value, you will.
Valuations can be expensive. If one is not necessary for you to negotiate a deal, you should not pay for one.
The seller has established a starting price for your negotiation. What you need to determine is whether the cash flow from the business can support that price.
Each buyer has different criteria for whether a deal will work for him or her and there is no right answer. The things that buyers should consider include:
- What is your risk tolerance?
- What is your required rate of return?
- How long are you willing to wait to get your investment back?
- Will cash flow from the business be sufficient to pay off any debt used to buy the business?
- Will cash flow from the business be sufficient to pay your salary if you are working in the business?
These questions will provide you will the information to determine if the asking price meets your criteria as a buyer. A business may be worth $100,000, but a particular buyer may not be able to afford the asking price.
Price is the negotiated amount for a particular transaction. While you need information to make an informed decision, a valuation will not necessarily give you that information. Your financial professional should be able to assist you in determining whether the asking price of a business meets your criteria.
© 2009 Florida Business Valuation Group