How to Find the Value of a Business You Want to Buy

It’s pretty exciting when you’ve been searching for a business to buy and you finally find one that checks your boxes. But, how do you know if the business you want is worth the asking price? While complicated, it can be done with the right information, tools and partners. The most common method uses the earnings of a company to arrive at a valuation. That figure is then compared to the other methods to see if they align. In the other methods, the assets of the company are considered and finally, the market conditions.

Methods for Evaluating a Business You Want to Buy

Looking at the earnings

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a way to measure a company’s ability to generate operating earnings. A multiple of the EBITDA is then used to calculate the company’s value, and factors such as intellectual property, goodwill and corporate location will help determine which multiple is used. Once a figure has been determined, a professional evaluator will try to confirm it by using the other valuation methods and comparing to ensure there are no big discrepancies.

Looking at assets

In this method, a valuator will consider the assets of the company to determine what it is worth. This calculation will include tangible assets, such as building, equipment, inventory, furniture, etc., and intangible assets. Intangible assets include a company’s patents, trademarks, brand recognition and reputation, and more.

Looking at the market

In this method, markets are considered. Evaluators will look at “comparables” which are the most recent sale prices for companies that have sold in the same market location. They will try to include sales of companies that are similar in size, industry, age, etc. to the company being evaluated. 

If there is a large difference between the EBITDA approach and the other two methods, the evaluator may decide to adjust the multiple that was used upwards or downwards. The exercise is complex and requires knowledge and judgment, making it an exercise in precision and creativity.

Conclusion

Often, entrepreneurs have unrealistic expectations of what their business is worth, and a potential buyer may have a very different value in mind. This difference in opinion can create conflict and turn an easy negotiation into a difficult one. This is why an objective business evaluation is important.
Professional business brokers have the expertise to determine the Most Probable Selling Price (MPSP). It is possible that the business is sold for a different price because it is simply a good fit with a buyer’s existing company, so it is important to remember that a successful negotiation is one where both parties are happy with the outcome. Investiprise has years of experience helping both buyers and business sellers, guiding both parties to a satisfactory conclusion. Browse our listings to find the perfect opportunity, and contact us to learn more to get started today!