Business Valuation: What Steps To Take Before Buying A Business

With today’s fast pace in business, there are times when we are presented with opportunities that seem good at face value, but it’s worth taking the time to check in and do your research before making a big decision. This is especially true when you’re presented the opportunity to buy a business.

Make sure that you’re taking a good look at your opportunity and taking the time to go through the process of business valuation—estimating the value of the owners’ economic interest in a business to determine the price of the business at the time it is sold. To do this, you might have to put in some extra work.

According to Washington D.C.-based forecasting firm, Kiplinger, “A trend we’re seeing now is that while business owners are doing a great job delivering value to their clients and growing their businesses, rarely are they coming to the negotiating table with their tax liabilities and financial statements in good order, or even in compliance. Because of the shorter duration of transactions in the market we are currently in, frequently dropping to 120, 90 and even 60 days, the quality of due diligence that entrepreneurs are conducting in advance of the sale is lacking. A few years ago, sellers would hire an independent third party to conduct an audit of their previous three years of financial statements, but now, due to the accelerated pace, audits might go back one year, if they are conducted at all.”

There are four things to keep in mind when going through the valuation process:

  1. Evaluating Current Economic Conditions
    Deciding whether a business that did well in the past can continue to do well in the future, while absorbing the disturbance of an ownership change means that you need to know the current financial landscape: the current national, regional, and local economic conditions and the condition of the industry in which you plan to buy will all affect your purchase. Think of what it would have been like to buy a Blockbuster Video franchise in 2006, shortly before the rise of Netflix.
  2. Completing a Financial Analysis
    Pay attention to the condition of the accounting practices of the business you want to buy. Make sure that you’re provided with all of the necessary historical accounting documents, including their cash flow statement. Your accountant can help analyze the information gathered to access your financial risk in the acquisition.
  3. Conducting a Normalization of Financial Statements
    This part of the business valuation process will tell you how much you can expect to make as owner of the business, and it’s important to evaluate all the adjustments that will come into play in order to decide if the purchase will be as successful as you need it to be to meet your goals as a business owner.
  4. Deciding on Income, Asset, or Market Approach to Valuation
    These three different techniques for defining how the final appraisal will be completed. It’s important to choose the correct approach for your specific business, and you’ll want to work with your Kruggel Lawton professional to make the right choice.

"In addition to a thorough analytical analysis and considering all valuation methods, Kruggel Lawton is poised to ask the right questions to properly evaluate the true future earnings potential as well as the assets and liabilities included in a prospective transaction. We take the time to inform our KLients of the impact various assumptions and business decisions can make on the value. As a buyer, you not only need to consider the purchase price, but what near-term decisions you may face such as potential cash outflow for capital equipment to maintain current operations or key employees that need to be retained. We will make sure you’re well informed of the value, potential tax considerations, and other business matters so that you can make an educated decision." reported Julie Alexander, CPA, CVA at Kruggel Lawton.

If you are thinking about buying a business, it can be a great way to achieve long-term goals for you and your family. We can help provide advice and guidance in your new venture. Contact us today.

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