Buying a new business is a big step, both personally and financially, and like with most business decisions there is some level of risk involved. Before purchasing a business you should always consult a financial advisor to ensure you’re making a sound investment, but before you get to that point there are a few formulas you can do yourself at home to see how your potential business measures up.
3 Simple Ways to Value a Business
When it comes to DIY business valuations there are 3 main methods:
- Asset Valuation – Simply combine the value of the assets of the business, including cash, equipment, property and receivables, then subtract any liabilities. This method will give you a good idea of what the business would be valued at if it closed its doors right now, but doesn’t take into consideration any future wealth generating potential.
- Capitalised Future Earnings – Purchasing a business means buying not only its current assets but all the future profits the business generates. This method of valuation considers your future return on investment (ROI) by averaging the net profit of the last 3 years via profit and loss statements. First you’ll need to decide on the rate of return you would like from the business, then divide the net profits by this rate of return X 100 and you’ll have an estimated purchase price.
- Comparable Sales – Take a look at recent sales of businesses with the industry to get a better understanding of the market. Talk to your broker about similar businesses that have recently been listed or sold, and keep an eye on ‘for sale’ listings in your sector to keep abreast of the financial health of the industry you’re buying into.
When it comes to business sales there is always a certain amount of risk involved. Buying into a franchise is a great way to get all the benefits of business ownership without some of the disadvantages of doing it all on your own.
To find out more about owning your own franchise, or to get more information about the value of a Kwik Kopy franchise, contact us today.