How Much is a Business Worth?

by Dave Meholovitch
 
How Much Is a Business Worth? A Business Valuation Will Tell You So you've finally found a business that interests you, it's time for a business valuation. Remember a business is worth only whatever someone is willing to pay for it at a given point in time. At this point that someone is you!
 
Why Do I Need to Do My Own Business Valuation?
The business valuation is one of the most important steps in determining whether you buy this business or not. If the Seller’s broker or an outside source has created a valuation report, fine. Get a copy but don’t put a lot of credence in it us it as a guide line. You still need to do your own evaluation.
 
Remember, the Seller’s accountant has been trying to save the Seller from paying as small an amount of taxes as legally as possible. What shows on the bottom line for tax purposes, in most cases, are not the true earnings of the company. neither does the balance sheet show true market value of the company’s assets because he has been depreciating the business.
 
Ok, What Do I Need For A Business Valuation?
The following documents are critical for you to do your business valuation.

1. Profit and loss statements for three years, created by an accountant, not created on the seller's computer.
2. Balance sheets for three years.
3. Federal Tax Returns (IRS) for three years.
4. Interim financials and balance sheets for the most recent reporting period.
5. Complete list of equipment, furniture and fixtures assigned market value.
6. Recent evaluation reports if any.
7. Appraisals on business assets.
8. Marketing and business plans including financial projections.
9. Brochures.

You have gathered all the information you will need to make a buying decision. You are now ready to…
 
Start Your Business Valuation of The Seller’s Business.
Remember, most businesses are managed in a manner to pay as little income tax as possible to the owner, not to see how much taxes they can pay. That’s why it is important to get a true financial report. You do not have to explain to the Seller why you are reconstructing the financials.
 
This is a very critical process to decide the worth of the business you are proposing to purchase. If you don’t feel comfortable, get some help.
 
Some Sellers will have already have done this, that’s okay, but you still want to do your own reconstruction. If the Seller presents you with a business valuation report with the financials reconstructed, watch out for overstated add backs or those items that can’t be verified. You only use numbers that can be verified from the financial information you have gathered yourself.
 
Things to Watch Out For
Sometimes, in an all cash business, the owner will not report all of his income. I do not listen to Sellers who want to add value to their business from unreported income. I tell them, too bad! The Seller either pays the piper up front or he pays when he sells. I figure if he will lie to Uncle Sam, he’ll lie to me. This should be a red flag.
 
This profit and loss reconstruction is the major factor in you determining the true worth of the business. You need to discuss each cash flow item with the Seller. You can do this in person or over the telephone. Don’t make a big deal out of this, but do get the information.
 
If the Seller asks why you need this information, tell him the truth. You are reconstructing his financial statements to show a true market value of his business. Many Sellers are hesitant to discuss some of the perks they have paid themselves. They probably have expensed items that were totally for personal use. These are the items you are trying to locate.
 
You will use this information only to justify the numbers you find through your reconstruction of the financial statements. You need to make the Seller feel comfortable in discussing these expense items. Assure him this kind of information stays with you and him only.
 
This process will help you determine the available dollars for you to service the debt, pay yourself or a manager, and give you a reasonable return on investment.
 
I know what you’re thinking…
This Sounds Complicated And I Need Help!
My book,Who Wants To Be the Boss?, has a whole chapter devoted to business valuation.
 
About the author:
Dave Meholovitch is a author, consultant, trainer and speaker who assists people with starting or buying a business. To see other offers and services, visit his web site at http://www.secrets-of-owning-a-business.com