Valuation can seem like a daunting and very foreign task, but once you've learnt a bit about what you should be looking for it becomes much easier. And as it's an essential step towards getting a good price for your new business, it's well worth knowing your stuff. This guide introduces to the main aspects of a business that affect its value, and how to find them out.
Examine the business' turnover, profit, sales, debt, expenses, cash flow and assets for a good feel of its financial situation and performance - the vendor provides you with these. Look at the financial history, and in particular why it's being sold - if profits are decreasing, the value will be lower. Find out about stocks, assets, premises, creditors, employees' salaries, suppliers - these will all affect the value according to how worthwhile or damaging you think they are to the business.
These are the parts of the business whose value can't be precisely quantified according to records, but which definitely affect value. For example, the business's relationship with customers and suppliers, its reputation, its market standing, the value of goodwill and any licenses, and any patents or intellectual property it holds right to. Consider how the value of these things will be affected if you buy the business.
Don't just take the word of the vendor - take valuation into your own hands. Consult an accountant or professional financial advisor, and speak to people who know the market. Talking to customers, suppliers and the business' wider network will also give you a clearer idea of how it's performing, and also helps you value intangible assets.
If you decide to make an offer after valuation and the vendor accepts, you are allowed to carry out due diligence before fully accepting the business. This is a period of time in which you can check all the information the vendor has given you to make sure it's accurate. Use accountant and solicitors.
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