Starting up your own company can be exciting and full of adventure, but it can also come with big risks. Sometimes buying a young company can be even more exciting because you get the benefits of an existing operation with fewer startup financial risks. Even purchasing an existing company typically takes financing from banks or other lenders though. Those lenders will want to know why the business is worth the amount of money you are paying for it.
While the actual value of a business is determined by formulas that include assets, liabilities and revenues, those factors are influenced by many smaller features of the business. The following is a checklist of 6 commonly over-looked items to research in order to verify the accuracy of the value of the company you want to buy:
1. Business Reputation
The image of a business to its customers and suppliers can be either an asset or a liability to a future owner. While it is difficult to transfer the strength or weakness of a company’s reputation into monetary value, it does play a role in how much you will have to spend on marketing and other image-developing strategies.
2. Customer Patterns
Understanding the type and pattern of customers that are attracted to the business influences how much the company is worth. Is the conversion rate of first-time customers to repeat customers high enough? How long does the average repeat customer stay loyal to the company? Are there peak buying seasons for customers or do sales remain constant throughout the year? These patterns are important to understand before purchasing the company.
3. OSHA Compliance
If the company is required by law to make certain allowances for health, safety or disabilities, knowing whether or not they have met those requirements is essential for determining the firm’s value. If you have to make major renovations or protocol changes immediately after buying the company, it could end up costing you tens of thousands of dollars.
4. Merchandise Return Rates
A company that has a high rate of product returns may not be worth as much as it claims. If there is a high rate, can you determine the reason or the patterns of merchandise returns? This could help you know what needs to be done to fix the problem and increase the company’s value in the future.
5. Salaries Discrepancies
Are there relatives on the payroll who are not actually employed by the company? Or are some salaries being reported as higher than they really are? These factors can influence the true versus the stated value of a company and determine whether you can secure enough funding for the purchase.
6. Special Seller-Customer Ties
Finally, it is important to determine if there are very many instances of special circumstances between the company and its customers. If the major customer is a family member, close friend or other special relationship that might not continue business with you after purchasing the company the value of the company may be lower than stated. Try as hard as you can to evaluate how many customers are only loyal to the current owner and not the product or service.
In addition to running the numbers on inventory, accounts receivable and payable, debts and company revenue, digging into the details of a business will help you determine its real value and help you secure the lender financing you need to begin your own business adventure.