How to Value And Buy An Existing Business In Nigeria
To value and buy an existing business is not what you should do without having done your own due diligence concerning the business you want to value and buy.
There are many questions to ask when it comes to valuing a business and you must be very careful about the answers that you accept.
When trying to value and buy an existing business, you should be able to have answers to the following questions; how can you determine the worth of the business? Do you value by asking to see the business books or do you base it on the existing clientele? What is the time frame to make it a reality? Once your offer is accepted, where do you go from there?
There are a whole lot of ways to value a business. There is no single way to value a business, though there are a lot of wrong ways to do it. The business is worth whatever you think it is worth, going by the criteria you used for valuation.
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To value and buy an existing business, you have to make your estimation using several different ways to value the business and then choose the mix that best reflects your final value estimate. You can start by looking at what the business owns its assets.
The balance sheet of the business can give you a head start on the business assets. If the company does not have a good balance sheet, you might have to reconsider buying it. The current business owners should know whether the business is profitable or not.
It is suicidal to buy a business that the current owner doesn’t even know whether it is profitable or not. To value and buy an existing business, you must know that revenue is the crudest way of valuing an existing business.
Many people have run into problems buy just trying to come up with a value for that stream of cash. You must know that businesses are valued at a multiple of their revenue, and the multiple depends on the industry.
For example, a business might sell for “three times sales” or “two times sales”. A good stockbroker should be able to help you research typical sales multiples for your industry.
If you are thinking of using the revenue for your valuation, you should think twice about that. In 2002, Amazon.com had sales of $4billion but no profit. So, you see that for someone going to buy Amazon.com because of its sales are going to be in a whole lot of trouble.
Earnings are important no doubt, but multiples of earnings are the better way to go about valuation. If a company makes a profit of $20,000, that money can be used for growth or dividend to you, the shareholder. You should be able to estimate the earnings for the next few years and see what it is worth to you.
You must be careful to put into considerations the market dynamics such as competition; price changes etc because they can have a great effect on the earnings in the future.
You can use the discounted cash-flow analysis, the same one that Warren Buffet uses. He does that by using the money that the business generates each year, projects it into the future and then calculates the worth of that cash-flow stream using the long-term Treasury bill interest rate. You can run it on excel using the NPV net present value function.
A quick and easy way is to divide the current yearly earnings by the long-term Treasury bill rate.
For example, if the shop earns $20,000 per year and T-bills are returning 2% interest, the business is equivalent to $10,000 worth of treasury bills. This is to say that $10,000 invested in treasury bills will generate the exact amount that the business yields in a year.
This simple technique puts an upper limit on your valuation, after all, why would you spend such amount buying the business when you can earn more with the same amount of money with less stress in treasury bills.
To value and buy an existing business, you must as a matter of importance consider all these points so as not to be on the losing end in the end.
There also cases of non-financial considerations that one might consider in making such business proposal. For example, you might pay more for shop that is next to your own existing business because the combined profit of the two businesses can be much rewarding
I sure hope that this article has succeeded in opening your eyes to the nature of business valuation and I believe that if you are going into it in the future, you sure know what to expect and how to go about it without losing money.
