Visitor Register Now

Login
Logout
My profile

Buying a business:
Estimating the value of the business

Once you have found a business, you need to decide whether it is the right one for you, and how much you think it is worth, and so you will need to obtain relevant information about it. If you are buying a business that is being marketed for sale, you may be provided with a sales memorandum that sets out relevant facts about the business. Otherwise, you will need to find out as much as you can about the business by other means, by considering information provided by the vendor and your own research.

Before the target company releases information to you, you will probably be required to sign a confidentiality agreement. You should check that the terms of the confidentiality agreement are not too onerous before you sign it.

The areas that you need to consider include the business, its goods or services, markets, competitors, customers, suppliers, premises, intellectual property and other assets, and its management. You should also look at the business' financial history, and consider its plans and forecasts.

You may need to obtain a professional valuation for certain assets, such as property and intellectual property rights.

There are various aspects to a business that give it value, such as the value of its assets, its profitability and its ability to generate cash. However you also need to consider how the business would fit with your other businesses and should, for example:

consider whether you can improve the target business. If the business is already well run and successful then you are less likely to be able to improve its value significantly

identify any benefits that the target business can bring to your business

estimate the cost and complexity of integrating the target business with your business

Once you have identified the relevant costs and savings, you should consider modelling the financial results of the combined entity, and preparing analyses to show the sensitivity of the forecasts to various assumptions. You are aiming to identify a range of values that you might be prepared to pay for the business, and might want to seek help with this from your accountant.