Are You Considering Buying a Business?

For some, the idea of buying an existing business is much easier then starting from scratch.  The advantages of purchasing generally include less startup costs, plus you can use current inventory and accounts receivable to manage cash flow easier. However, the purchase cost may be higher because of the initial business concept, established customer base, brand awareness and other fundamentals already in place.   
 
After you identify your interests, consider your own talents, weigh in the location and time commitment, then ask yourself “why is this business for sale”. Use the information below to help make your best informed decision on the business value. 
 
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business.  Here are a few:
  • Financial Statements:  Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not accept a simple financial review by the business itself.
  • Tax Returns: Review the business's tax returns from the past three to five years. This will help you determine the profitability of the business as well as any outstanding tax liability.
  • Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
  • Excess Earning Method: Similar to the capitalized earning method, except that it separates return on assets from other earnings.
  • Cash Flow Method: This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm's ability to service debt.
  • Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
  • Value of Specific Intangible Assets Method: This method compares buying a wanted intangible asset versus creating it.
For more information on Business Valuation,
Please contact David Diamond, CPA,

ddiamond@krdcpas.com   847-278-4300

For a more detailed list of the due diligence in evaluating a business visit:  https://www.sba.gov/starting-business/how-start-business/business-types/buying-existing-businesses
 
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