Buying an established business means immediate cash flow. The business will have a financial history, which gives you an idea of what to expect and can make it easier to secure loans and attract investors. You will acquire existing customers, contacts, goodwill, suppliers, staff, plant, equipment and inventory
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- Figure out what you’re interested in
- Figure out if the business will be successful
- Understand why the business is for sale to determine any risks
- Find the business that aligns with your budget and goals
- Do your due diligence before making an offer
- Evaluate the price of the business:
- Get the capital needed to make the purchase
Discretionary income-based valuation
Another simple but effective way of valuing small businesses involves determining the current owner’s discretionary income.
This offers valuable insight into what a buyer can expect to earn on a monthly or yearly basis (assuming no substantial changes are made to the company’s current situation), what their ROI is likely to be and how long it will take to realize that return.
To determine discretionary income, take the amount the owner has declared on their income tax, add in any discretionary expenses such as automobile expenses, travel expenses, salaries, interest costs for business loans and depreciation.
Then, add those discretionary expenses back into the owner’s declared income and multiply the result by 1.5 to 2.5 to come up with the final value for the business.
The multiplier provides a significant range in which to negotiate the final price based on intangible items that the equation does not factor in, as described in previous methods.
This valuation method’s greatest limitation is its assumption that the business will continue to operate unchanged after changing ownership.
This assumption depends largely on how the company is currently set up and run.
If the current owner plays in integral role in daily operations (rather than a more distant oversight role), a prospective buyer will need to very careful to determine if he or she can fill that same role in the same way. If not, the discretionary income method of valuation is likely to be misleading.
Summary of what you will need to Review from the Seller:
3 years of P&L (Profit and Loss) financial statements including this Y-T-D
3 years of tax returns (business or business portion of personal tax returns)
Any lease agreements if applicable
Balance sheet
3 years of bank statements
Any additional Bank Records (Credit card statements, etc.)
Asset List – Inventory, DBA, equipment, etc. that is transferable with the business
Business/Owner Bio – How long has the business been in operation? How long have you owned the company? (Etc)
When you rely on us for buying a business online in Southern California, our valuation offers best insight into many things that buyer is always looking for. You will get to know what exactly a buyer can earn on an annual or monthly basis with the basic assumption that no drastic changes are introduced into existing condition of the company. You will also understand the accurate ROI is going to be and the exact period needed for realizing that return.