Buy an existing business
How to value a business
Valuing a business is an important part of buying an existing business.
There are several valuation methods you can use. For specific advice on valuation methods see value and market your business for sale.
Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.
Determine how healthy the business is
To get a general idea of how healthy the business is, look at:
- the history of the business
- its current performance - sales, turnover, profit
- future projections or a business plan
- its financial situation - cashflow, debts, expenses, assets
- why the business is being sold
- any outstanding or major litigation the business is involved in
- any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done through Invest Northern Ireland's Business Information Centre.
Valuing intangible assets
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:
- the company's reputation
- the relationship with suppliers
- the value of goodwill
- the value of licences
- patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business. Read more about business asset valuation.
Other considerations when valuing a business
The list below details other factors that will affect the value:
- benchmarking - what other businesses in the sector have sold for
- who else in the sector is for sale or on the market
- the economic climate - will any new government legislation have an impact on the business
Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.
Conducting due diligence
If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence. See make sure a business is worth buying: due diligence.