FindLaw KnowledgeBasePublished: 2012-12-18
There comes a time in the lives of many Pennsylvania business owners when they have to consider selling their business. Whether this is a joyous occasion or not, it is important to understand how a business is valued. Otherwise, business owners could be getting less than they deserve.
Valuing a business
There are many factors that go into valuing a business, and sometimes the calculations are more important than the actual numerical result itself. One important factor that goes into valuing a business is the profits. Buyers want to know what the expected profits are in the next year and what the expected profits are for the future. Buyers have an expected profit in mind when looking at businesses and, like any other investment, want to get a return on their investment.
Buyers will also take the risk level of the business into account. For example, buyers purchasing a risky business will more likely want to see higher returns than buyers purchasing businesses that are less risky. Therefore the risk of the venture is something to keep in mind attracting potential buyers for the business.
Growth rates of businesses are also taken into consideration. For example, a business that is stable and sees a fair amount of profits but does not expect much future growth is worth less than a business that may not see as many profits at the time but has a higher growth rate.
After the business is properly valued, the next important step is the negotiation. Buyers are smart. They know how to negotiate. The seller, however, holds leverage, especially if the seller is not in a hurry to get out of the business. There are certain things that business owners can do to ensure their business is attractive to purchase therefore hold a good amount of bargaining power.
It is important to make sure that buyers know that they are not the seller’s only option. It is also important to look at the customer base and seek out good customers who can provide references to potential buyers. Key employees, such as those in a management position, need to understand the purpose of the sale in order to help create cohesion among the workers who stay. A stable and happy workforce is a better look than rats jumping ship.
Buyers will be very interested in the financials of a business, so sellers should make sure that their financials are audited by a reputable firm. Finally, when a seller likely knows who she or he will sell to, be aware of the effect that signing the letter of intent has because the LOI often includes a clause that prohibits sellers from having conversations with any other buyers.
Legal help in business transactions
A lawyer is one of several vital tools at the disposal of an owner selling a business. An experienced business attorney can help s business owner value his or her business and create the right deal.