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01 Sep 2013

How do I consider the purchase price?

 

The purchase price is based on a myriad of factors and not just the physical cost.  The following items are considered when negotiating price:


Future potential

The history of the businesses cash flow is considered as a solid indicator for the future performance of the business.  This is in turn tied up with what the new owner wishes to achieve with the business.   When calculating a sale price as a general rule cash flow is multiplied by anywhere between 2-4 times for small businesses and 3 to 6 times for medium sized businesses.

Cash flow is considered against revenue.  Although one business may have a much higher revenue, its cash flow may be lower so it therefore may not command as high a purchase price as one that has a lower revenue.  If two businesses are on equal footing with revenue then the one with the higher cash flow will usually be worth more on the market.

 

Asset information

When calculating a value, a potential buyer must consider exactly what assets are for sale, the type and age of the asset, it’s depreciation value and tax implications as well as what impact this may have on rates with the lender.  Non tangible items such as a customer list or goodwill must also be taken into account.  A business with newer assets will likely have a higher purchase price as they will not require updating in the near future.

 

Return on investment

The purchase price also takes into account the buyers expected return on investment (ROI).  If a business has poor financials, unpredictable sales and profit margins and other miscellaneous issues, the ROI may be seen as risky, this can lower the sale price due to the risk factor.

 

Deal structure

When selling the purchase price is affected by whether the buyer is taking advantage of seller financing, what stock and assets are included in price (this may have tax implications), consultation costs and the liabilities incurred in the sale. 


A shrewd purchaser must carefully consider all the above subsections when considering a purchase price on a business.  It is usually safer to pay a slightly larger sum for a solid business with a good track record and prospects, than to pay a bargain price for a risky business.

If you require further assistance contact us at Alert Property Group.

 

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