There are two ways an entrepreneur can start up a business, one is to build a business from scratch, another is to buy a existing business to get started. It is important to know that buying an existing business requires a great deal of analysis and evaluation to ensure that what the entrepreneur is purchasing meets his or her needs and expectations
There are advantages of buying a business rather than establishing the star-tups from the beginning. A profitable business has developed successful relationships with critical suppliers, and has mastered the day-to-day operation of the business. purchasing an existing business saves help the entrepreneur the time and energy required to plan and launch a new business. The buyer gets a business that is already generating cash and perhaps profits as well.
Steps of Purchasing a Business
Purchasing a existing business is long and complicated process, The first is to develop a list of criteria for the potential business. for example, you may set up criteria as follows:
- The type of business. What types of business you would like to purchase?
- The industry of the business. What industry you want to get into?
- The size of the business
- The location of the business
- The capital requirements
Once you know the criteria and parameters for the ideal candidate, you can begin your search. Buyers should consider all businesses that meet their criteria. You need also consider those that may not be listed for sale. Just because a business does not have a “for sale” sign in the window does not mean it is not for sale. In fact, the hidden market of companies that might be for sale but are not advertised as such is one of the richest sources of top-quality businesses.
After you have established a list of potential acquisition candidates, you need to have thorough analysis of the potential candidates. You may try your test to get the answers to the following questions:
- Why does the owner want to sell?
- What is the real value of the firm’s assets?
- What is the market potential for the company’s products or services?
- What legal aspects of the business represent known or hidden risks?
- Is the business financially sound?
Valuation of Business
Knowing the real value of the business is one of the key process in buying a business. When conducting a business valuation, you need to choose an appropriate evaluation methods based on the characteristics of the business. There are basically three approaches to the business valuation: the balance sheet methods, the earning methods and market methods.
Balance Sheet Valuation Techniques: The balance sheet method computes the book value of a company’s net worth, or owner’s equity and uses this figure as the value. The issue with the techniques is that the book value of the assets on the book may not reflect the reality: the market price of the assets. When the business owner use the technique, it is important to adjust the book value of net worth to reflect the actual market value. The values reported on a company’s books may either overstate or understate the true value of assets and liabilities.
Future Earning Valuation Techniques: The buyer of an existing business is purchasing its future income potential. The earnings approach considers the future income potential of the business. There are various form of valuation model for this techniques, however, the discounted future earning methods is one of the common used. The technique assumes that a dollar earned in the future will be worth less than that same dollar today. Using the discounted future earnings approach, the buyer estimates the company’s net income for several years into the future and then discounts these future earnings back to their present value. The resulting present value is an estimate of the company’s worth.
Market Valuation Techniques: The technique uses the price/earnings ratios of similar businesses to establish the value of a company. The buyer must use businesses whose stocks are publicly traded in order to get a meaningful comparison. The advantage of the technique is its simplicity, however, it may be not easy to find similar public companies.