When it comes to the world of commercial real estate, we often approach the valuation of a company at the request of a seller who is not sure what the property is worth or who needs a negotiating tool to bring up a low offer. But just as important to consider in the purchase of a company is valuing a business for sale when you're the buyer. How do you know the seller is asking a fair value? Is there something going on with the company if their asking price seems too good to be true or too ridiculous to consider? In this piece, we'll take a solid look at why it's vital to have a business valuation performed on a company you're considering purchasing.
Why Valuing a Business for Sale Helps Ensure a Smart Investment
Finds Potential Problems
The first thing that can arise in business valuations is potential problems with the company that could lead to serious problems and investment risk down the road. If the current owner is reporting income but not mentioning that it's been a banner year or that income can be irregular in that industry, it's easy to assume that the income level will remain steady at the current levels well into the future. Unfortunately, when the industry goes back into a bust cycle or otherwise goes through serious changes, your investment may end up being a bad risk. A proper business valuation provides you with a stronger set of background information so that you can make a solid informed decision about whether this business is the one you want to buy or if you'd do better to wait for another opportunity to come along.
Discovers Incorrect Valuation Assumptions
Buyers and sellers often have vastly different ideas of where a business' value actually falls. The buyer sees the potential risks and drawbacks, while the seller sees years of dedication, hard work and toil that has built a successful business. Because the valuation of a company must take a neutral viewpoint, the business appraiser can find the true value of the company by both considering all the potential risks that may be in the operation as well as the goodwill that the seller has built up over the years in the community or industry.
Provides a Solid Negotiation Point
One of the most nerve-wracking decision points for many interested in purchasing a business is the sentence, "make me an offer." Suddenly, you're stuck in a careful dance, trying to determine a fair price for the business that neither offends the current owner as being too low nor leaves you paying far too much for a business of questionable value. Just remember, there's no shame in admitting that you're not sure what that would be and that you'll get back to the owner with a potential figure. Business appraisals provide a safe middle ground when it comes to negotiating a price for a business, because you know your offer or counteroffer is based on the actual value of the company.
By valuing a business for sale prior to entering negotiations, you're ensuring that you know all the aspects that could cause problems for you down the road.