Determining How Much Your Business is Worth

4. Am I responsible for the prior businesses debts after I buy the business?
Laws vary from state to state. Successor liability laws transfer responsibility for payment of certain business debts to the new owner when a business is sold. In the majority of small business transactions, the sale will be an "asset sale," and the seller will pay liabilities and keep current assets. Unless you buy the actual Corporation, a "stock sale," you would not be responsible for liabilities, unless they are specifically agreed to in the Closing Documents. You should check for possible back taxes, liens, penalties and fines that may transfer to you upon purchase of the new business. Your CPA or Attorney, or the Closing Attorney will generally handle that task, so that you are assured you are receiving a clear title.

5. Are some business locations better than others?
For many businesses that depend upon drive-by business and/or easy consumer access, "YES!" You can have the best business in the world, but if it is located in a dead-end cul-de-sac in a dangerous part of town, your business will probably fail. Time and effort devoted to selecting your business location can mean the difference between success and failure. The kind of business you are in, the potential market, the availability of employees, and the number of competitive businesses should all be determining factors in your choice of location.

On the other hand, many businesses do not depend upon a high visibility location, and you can reduce your overhead costs dramatically, and make more profit, if you choose a location for its access to cheap labor, the loading dock you may need, easy truck turn-around, low taxes, commute time, etc.

If you are buying an existing business, the prior owner has already resolved many of these issues. If the business is doing well where it is, and growing as it should, moving it may not be a wise idea, and you can be happy that someone else did all that location work for you!

6. What about the Company Name?
The right to use the business name is part of the sale, nearly always. You may not be buying the Corporation, but you are buying the DBA, or Doing Business As name. This is generally a very important part of the goodwill if you are purchasing an existing business. Customers turn to this company for their products & services, and the company makes money. That is one of the reasons you may want to buy the business. You may want to think long and hard before changing that name, and risking the loss of customers and revenue.

If you do want a new name, you can request a report from a search company that will check records in the US Patent and Trademark Office, state registers and various other business sources. There usually is a fee for this service. Some companies are: CSC, The US Corporation Company, 1090 Vermont Ave NW, Washington DC 20005, 800 241-6518. Thomson and Thomson, 500 Victory Road, North Quincy MA 02171-3145, 800-692-8833.

7. How much is the business worth?
There is no simple answer or formula for evaluating the value of a business. The price that the business can command in the market will actually change for the same business depending upon the terms of the sale. There are appraisers that specialize in valuing a business. Professional business brokers can give a range of prices that will be fairly accurate for many small businesses, based on experience with the market, rules of thumb, and an analysis of financial statements and cash flow.

Some brokers believe that cash flow is the most important factor to consider in a small business sale, as the business must be purchased with that available cash flow for an owner-operator buyer to be able to survive after the sale.

Other important factors to consider include: competition, industry trends, and like-size comparison with other companies in the industry, balance sheet ratios, income statement analysis and trends, gross and net margins, type and condition of equipment, and future capital requirements, customer base: target, size, quality, diversification, location, avenues of growth for the company under new ownership, owner's role, now and after the sale financial needs and goals of the buyer and the seller, difficulty of someone else learning the business, and potential for growth in this business and in the industry as a whole.

A professional Business Broker can assist you with this.