Chartered Professional Accountants
When it comes to buying a small business, the big question is: how much does it cost?
“Several different methodologies can be used to value a small business, but ultimately the beauty is in the eye of the beholder,” says chartered professional accountant Deborah Rosati who has helped many entrepreneurs purchase and operate businesses.
“What that means is: the business is worth what a buyer is willing to pay for it. A buyer should look at much more than just the business’s latest financial statements to determine how much a business may be worth to them.”
Here are some questions potential buyers of a small business should ask in order to determine what the business may be worth to them.
1. Why is the current owner selling the business? The reason the current owner is selling the business may be an indication of its future prospects. Perhaps the owner cannot continue the business due to age, health or death and no family member is able to carry on the business. On the other hand, if a young entrepreneur hasn’t got a convincing reason for selling profitable company with a good outlook that may be an indication of hidden problems.
“If the owner’s reasons for selling the business aren’t clear or if there is undue pressure being placed on the buyer to close the deal, it’s time to take a step back,” Ms. Rosati advises. “Talk to customers, employees or other stakeholders to get their perspective on the business and its prospects.”
2. How well do you understand the company’s business and its industry? The better the buyer understands the company, its business and its industry, the more likely he or she will be able to replicate its revenues.
“If the buyer doesn’t have the expertise or availability to operate the business, he or she may need to hire a management team,” says chartered professional accountant Don McKinnon of KPMG in Waterloo. “Those buyers will need to factor in the cost of those salaries when deciding how much they are willing to pay for the business.”
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