Once a potential business owner has found a well-matched business, it is essential that due diligence be performed. Before purchasing the company, every aspect of its operations must be investigated to find out profitability, business plan viability, and even suitable offer price. For more on due diligence, please see Chapter Six.
After due diligence has been suitably executed, it is time to consider the financial aspects of purchasing the business. There are many different ways to figure out the true value of a business, and though the services of a professional asset appraiser will likely be necessary, it is important to note that a general idea of how much a business is worth may help determine if further interest is warranted or even in the best interest of the prospective buyer.
The person who is the most knowledgeable in the business is the best situated to give a realistic picture of the state of the business. Asking the owner to give a projected financial statement can be a useful window into how the business may operate. Looking at this document and comparing it to past statements can also show a potential owner how the present owner does business, and any glitches in the present company’s accounting that may exist. All too often, the difference between what a potential owner believes a company to be worth and what a previous owner believes it to be worth is so great that an early end to business negotiations is ideal.
