You must be wondering why you need to know about the valuations. It's a bunch of nonsense about money, and you don't want any of it. You should hire a professional or, even better, let the bank that is giving you the loan do all the valuation work.
But there is a small problem. If you don't evaluate the potential of the business you're about to buy yourself, you could end up paying too much for it. You need to find out if the price is fair and if the professional's valuation is in line with what you think it's worth. Yes, a professional would do a good job, but you would want a second opinion, and who better to talk to than yourself?
You would also want to show the banker that you are well-informed about the business you want to get into, the process, and how accurate your estimates are. You want to give the impression that you are smart enough not to be taken advantage of.
Before we get to the part where we do the math, you should take the following steps:
Come to the place:/b>
There's nothing like going through the building and seeing how it works. Don't just look at the business's great numbers on paper; go there. In fact, make an appointment with the seller to look at the business, and then go back by yourself. This is the best way to learn what's really going on.
Choose whether or not to hire a pro:
You should really think about calling someone to do the valuation. If you don't want to pay someone to do an evaluation, at least hire a lawyer to help you with the sales contract. There are a lot of legal issues that come up in these kinds of deals, and only a professional can make sure that the seller doesn't put you in a bad position.
Ask for information about money:
The least you can ask for is:
- Statements of finances for the past three years.
- Tax returns from companies for the past three years.
- A list of valuable things
- A list of the gear.
- List of things for sale
- The age of accounts receivable.
- The age of accounts payable.
Check the prices of similar companies and the market: You could hire a professional, but the best place to find information is on the Internet. Check out the forums, read the articles, and ask the experts in the field.
Let's move on to figuring out how much something is worth.
Some of the most important ratios to think about are:
- Price to Sales
Price to Earnings (P/E) (net)
- Book Price
- Price to EBITDA or Price to Cash Flow (Earnings Before Interest, Taxes, Depreciation and Amortization)
Most of the time, the following methods are used to value something:
Adjusted Book Value: It is based on what the business owns and what it owes.
Asset Valuation:
It is based on what the business has in stock and what changes have been made to the space it uses. The valuation can also take into account cash left over after the income statement has been adjusted.
- Capitalized Earnings Method: Based on the investor's expected rate of return on earnings.
- Valuation of capitalization of income: Gives the most credit to things that can't be seen or touched, but not to things that can be seen or touched.
Method of Cash Flow: Based on how much of a loan a person could get based on the business's cash flow. The value of the business is the amount of the loan.
- "Cost to Create Approach (Leapfrog Start Up)"
Used when someone wants to buy a business that is already up and running to save time and money on the start-up process.
Cash flow that has been discounted: Based on the idea that a dollar you get today is worth more than a dollar you get later. It lowers the expected earnings of the business to account for real growth, inflation, and risk.
You must ask the professional to explain the method of valuation and why it was used. To figure out how much risk you are taking, you need to know why the prices are what they are.
There are other ways to figure out how much something is worth, which I will talk about in my next article.
