An important step in the business acquisition process is determining the true value of the business to ensure you are paying an appropriate price. Valuation of a business can be complicated and can depend on the type of company in question, your goals, and many other factors. While this process may seem daunting, an experienced business lawyer can help to identify steps to take and help you decide whether a price is right. The following are some of the issues to consider when evaluating the price of an acquisition.
Examine the Current State of the Business
There are many aspects of a business that should be closely examined before an offer is made, including, but not limited to:
- Sales and profits;
- Expenses and debts;
- Turnover rate;
- Cash flow;
- Equipment, inventory, property, and other assets;
- Performance history;
- Reputation and goodwill;
- Reasons why the business is up for sale.
You can decide how damaging you feel negative aspects may be and how worthwhile positive considerations are to the state of the company. Based on your own business philosophy and goals, you can weigh these factors to estimate worth. You can also consult with business experts for a more objective estimate. Depending on the nature of the business, the factors you want to consider can vary significantly.
Due Diligence
A business can present you with a mountain of information during the sales process and you need to ensure that this information is accurate and reflects the actual state of the company. The process of due diligence is critical to review all financial statements and records and ensure that you have an accurate picture of profits, losses, expenses, and more. With the assistance of a business law firm, thorough due diligence can help you be confident in whether you are paying the right price for your acquisition.
Don’t Forget About Intangibles
While profit margins and corporate debts can be specifically quantified, many aspects of a business that can affect overall value are not so concrete. Factors such as the business’s reputation, goodwill, intellectual property, licenses, relationship with clients and vendors, location, and more can certainly increase or decrease the value of a business. You should also consider whether any positive factors–such as business relationships–may be affected by a change in ownership.
Consult with an Experienced San Jose Business Attorney
Purchasing a business can be extremely lucrative–or it can be costly if you do not perform the necessary due diligence to ensure you are not overpaying for a failing enterprise. At Structure Law Group in San Jose, our skilled business lawyers can assist you throughout every stage of your business acquisition from examining prospects to finalization of the sales contract. If you are seeking to acquire a business or engage in any other type of business transaction, please consult with a member of our team today by calling 408-441-7500 or using our online contact form.