Owning a Denver-area small business may help you achieve the American dream. If you do not have a brilliant business idea, you may be thinking about buying someone else’s venture. To be certain you are making a wise investment, though, you must perform some due diligence.
Business owners typically have wide latitude when setting a venture’s asking price. To avoid paying too much, you should consider obtaining an independent valuation for any business you may purchase. While pinning down the exact value of any business can be challenging, your appraiser is likely to use one of the following common approaches:
- Market-based valuation
A business’s value may fluctuate because of market conditions. With a market-based valuation, your appraiser determines how much the venture is worth on the open market. While looking at comparable businesses is essential, the appraiser must also consider the industry, business size, productivity, potential buyers and other factors.
- Earnings-based valuation
While not all businesses are profitable, many are. Accordingly, it is possible to use a venture’s earnings or cash flow to determine its overall value. Going this route, however, requires an extensive review of business records to identify potentially doctored books or other accounting-related concerns. Nonetheless, if your appraiser can access the company’s financial forecasts, you may have a decent picture of the business’s worth.
- Asset-based valuation
Many businesses are valuable because of the assets they own. For example, if you invest in a restaurant someone else started, you may benefit from professional-grade appliances, furnishings and existing equipment. When you use asset-based valuation, you calculate the total value of the business’s property. Compensating for depreciation and other expenses is typically necessary with this type of business valuation.
If you are thinking about buying a business, you likely already have plans to make the venture successful. You do not want to get ahead of yourself, though. By obtaining an accurate valuation before completing the purchase, you put your new business on a solid financial foundation.