As a business buyer, the number that will be at the center of your attention throughout the business transaction is the purchase price. Just how much are you willing to pay for the business, and how does the seller arrive at their asking price? These are important considerations, and as you progress through the due diligence phase, you will be evaluating the value of the business. You have already evaluated the inventory, the equipment, and furnishings. You will now take these evaluations and combine them with the financial records to get the final evaluation of the business.
Part 3: Financial Records and Contracts
You will need to examine financial statements, sales records, and tax returns for the last few years.
This is a great time to enlist the help of your business broker and possibly an accountant. Both will be familiar with determining what the records really show in terms of how the business has been doing.
Have your business broker determine the operating ratios of the business, as these ratios can be a good indicator to compare against industry standards.
Examine any and all contracts and agreements the business currently has. These include purchase agreements, leases, contractor agreements, and any other legal instruments.
The price of a business may change based on the economic climate or on the motivation of the seller, but in all reality the price of a business is what a buyer is willing to pay for it. Take a good look at the inventory (see Part 1: The Inventory) and other hard assets (see Part 2: Equipment and Furnishings), along with the financial records of the business before you head to the negotiation table.