If you are a prospective entrepreneur looking to buy your own business, you may have already noticed the unique nature of business listing prices – they seem to be all over the place.
How do you as a buyer interpret the listing price of a business as it relates to its fiscal health?
Listing prices are typically based on the cash flow the business generates, but there are other aspects that will speak to the overall health of a business which buyers should pay attention to. Here’s a few to consider:
If a business has very consistent numbers, it might mean less risk for a buyer. Remember that the value of a business to you is the earnings it will have in the future. Consistency year over year is what you are looking for. Many businesses will have seasonal fluctuations that have everything to do with the local economy and seasonal shifts and nothing to do with the health of the business. If you are seeing large annual fluctuations, ask your business broker if those fluctuations are merely seasonal or something more problematic.
In order for you to pay yourself and pay back any debt you incurred with the purchase of the business the business will need to be generating operating profits. A business with numbers that consistently show operating profits will be a better bet than a business that is only breaking even. A caveat here – a business that isn’t doing so well but has easily remedied issues (like staffing changes, adding a marketing plan where none exists, etc.) might be a good deal if you can get it for a great price.
Diverse Customer Base
In a business that has a diverse customer base the loss of a single customer will not be as catastrophic as it would be for a business with only a small handful of clients. Look for both a large number of clients and clients across a diverse spectrum.
Reputation and Brand
A business with a great reputation or a very well established brand will have a more loyal clientele, meaning less work for you as the new owner. Instead of having to spend your time rebuilding a poor reputation you will be able to focus your marketing time on acquiring new customers.
If a business is well managed by the staff without the owner having to be present 100% of the time – and if those managers/staff are willing to stay on if the business changes hands, it can be a good sign for a potential buyer. It will mean less disruption when the business changes hands and less of a learning curve for you as a new owner because there will be staff present to help with many aspects of day-to-day operations.
If you need help determining if the listing price of a business really reflects reality, talk to your business broker. They know the current market, what recent comparable businesses have actually sold for and what aspects of a business can bring the most to a new owner.
Are you a future business buyer who has questions about the value of businesses you have seen for sale? Have you come across businesses that seem over or under priced? Leave us a comment or question and we will be happy to assist you with your business search.
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