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If you’re searching for a business to purchase, it’s essential to understand its value so you can reach a reasonable purchase price. Remember that the buy business asking price put forth by the seller is likely much higher than what the business is really worth. That’s why it’s crucial for you to perform a detailed business valuation to discover its actual value.

A business valuation is a regular aspect of any buy business endeavour. Keep in mind that buyers value a business differently than sellers. Sellers place an excessively high price on their business because of the history they’ve had with it, their personal feelings regarding it and the difficult work they’ve put in throughout the years. But when you determine the value of a business, those factors shouldn’t be calculated, or even considered in the purchase price.

To value a business, there are five ways to determine its worth. They are liquidation value, asset valuation, income multiple, income capitalization and rules of thumb. Before you buy a business, you need to determine which method will provide you with the best business valuation.

1. Liquidation Value. This is based on the value of the company’s assets if they were forced to sell in under 12 months.

2. Asset Valuation. This method factors in all assets of a business and calculates price appropriately. It is probably the least favored business valuation method for those considering buying a small business. That’s because even though a business might have great assets, it still might not make a sufficient profit.

3. Income Multiple. The net income and other factors determine the selling price. This is the preferred method to use to value a business.

4. Income Capitalization. Historical data and various hypotheses are used to calculate future income of the business. This buy business method is typically used for large business purchases.

5. Rules of Thumb. The selling price of similar businesses is factored in to cash flow or a percentage of revenue equation. Since this calculation is too general, it’s not the best way to value a business.

Of all these business valuation methods, the Income Multiple calculation is the most beneficial to buyers because it provides an accurate amount of how much profit they can expect from the business. In buy business terms, this is known as the Owner Benefit, also referred to as Seller’s Discretionary Earnings or Adjusted Earnings.

The Owner Benefit is based on previous financial records. It is the total sum the buyer can expect to meet salary, pay any debts and promote the business. But for a true calculated amount, it’s important to ask the seller what formula was used to arrive at the Owner Benefit figure.

The optimal formula to use is: the pre-tax profit + owner’s salary + additional owner’s benefits or other perks + interest + depreciation less an allocation for future capital expenditures where appropriate. Previous history has shown us that this particular formula is best in terms of actual value of business accuracy.

When you purchase a business based on the Owner Benefit figure, you’ll likely pay somewhere between one to three times the business valuation total. Usually, the one-time multiple figure is utilized when purchasing a consulting business or professional service which is operated by the seller. The three times the Owner Benefit amount is generally what businesses should receive that have been in operation for more than three years, have a large customer base, some proprietary items, a competitive advantage, and good growth potential.

The Owner Benefit is just part of the equation when you buy a business. When you attempt to value a business, actual multiples need to be carefully considered. These encompass simple buy business basics, such as how long it has been operating, lease terms if the location is crucial to the enterprise, its competition, the employees, systems, deal terms, the volume of its current customer base, loyalty of customers, previous stability of the business, and most importantly, how well the business will switch over to new ownership.

The multiple aspect covers all tangibles that go to the core of a business. When you buy a business, it is essential to know and evaluate what the business valuation means to you. There are resources that can assist you with these buy business methods. But if you plan to buy a business, it’s critical that you learn how to read and analyze financial statements.

Once you value a business, it will help with your decision on whether to buy it and at what price. When you implement buy business strategies, you will be more confident in negotiating a deal with terms of value that meet your needs. Understanding business valuation formulas also ensures that you will not be overpaying for the business you desire.

Richard Parker is the President and founder of the Diomo Corporation - The Business Buyer Resource Center. His inspiring materials, seminars and consulting have assisted thousands of business buyers with achieving their life long dream of buying a business.

Just what is due diligence and why is due diligence when buying a business so important?

Due diligence is definitely the most important aspect of any buying transaction. It is the period when you will have complete access to all company files and records as a final step to analyze the business and uncover any potential problems.

While the formal due diligence stage generally begins after an agreement is reached with the seller, to avoid any pitfalls a buyer’s diligent investigation of the business must begin the moment a business becomes of interest. And therefore, due diligence is an essential aspect of the buy a business process.

The due diligence process goes beyond a simple review of financial statements and tax returns. In actual fact, due diligence when buying a business involves every detail associated with the business in question.

The due diligence checklist starts with the information accumulation stage. This will enable you to establish a pros and cons list about the business. When active in the due diligence process, consider yourself to be a detective searching for every detail you can find out about the business. Before contacting the seller, do some basic information gathering using the Internet. As an aspect of your due diligence checklist, look through online records to find out whatever you can about the business you’re currently interested in purchasing. Also do some internet research into the specific industry area, suppliers, competition and the general market potential.

From the information that you’ve acquired, make a list of questions that have to be brought up with the seller. If you are pleased with what the information is revealing about the business, it’s time to move on to the next phase of the due diligence process and contact the seller.

Due diligence when purchasing a business is incredibly important when making any sort of offer before the actual acquisition. At this point, due diligence is crucial when going over all of the business records. As part of the due diligence process, create a list for the seller of all the materials you want to review. Then, create a timeline for yourself on what you plan to investigate, how long you plan to dedicate to each segment of the business, and which parts you are going to need professional advice, such as from a CPA or business lawyer.

While most sellers or brokers have a tendency to rush the inspection period of the due diligence process, always give yourself as much time as you think you’ll need. A minimum of a 20 business day time period is an acceptable amount of time for the inspection stage in most contracts, but if you need longer, don’t be afraid to ask for it. And remember, the formal due diligence process that is referenced in any business purchase agreement should not begin until you have all the materials requested from the seller.

Take your time when reviewing all the business operations books, financial statements and tax records. Always keep your due diligence checklist on you so that you can write down questions, follow-ups and other points you want to go over with the seller. As part of the due diligence when purchasing a business, it’s normal to discover inconsistencies or potentially questionable items. Jot them all down on your due diligence checklist and approach the seller when you have completed your due diligence review. The information will assist you with building a case for discerning whether renegotiation of price, terms or deal parameters may be required.

If your due diligence uncovers some major problems and the seller declines to renegotiate the deal or fails to accept your solution, then you must have the right to walk away as long as the agreement has language that allows you to do so. Therefore, make certain any agreement you sign protects you during the due diligence period when buying a business or else you may have a major problem. In fact, business industry statistics show that 5 out of 10 deals fall apart in the formal due diligence process stage.

If after completing your due diligence checklist you are not 100% certain about buying the business, then you might need to investigate further or walk away from the deal. Consider what about the business is giving you an uncertain feeling. Perhaps you need to gather additional information. Or maybe your due diligence revealed areas of concern that make you feel uneasy. Or it could just be cold feet. If additional due diligence will not ease your concerns, then it’s best to walk away.

Due diligence when buying a business is all you have to go on in order to make an informed decision on whether or not to purchase the business. When conducted properly, your final decision should be an easy one.

Richard Parker is the President and founder of the Diomo Corporation - The Business Buyer Resource Center. His inspiring materials, seminars and consulting have assisted thousands of business buyers with achieving their life long dream of buying a business.

Are you trying to find a business that won’t be unfavorably affected by the current economic slump? You should be! So, allow me a moment to share an important piece of advice with you.

Buy a liquor store.

Liquor stores are incredibly recession-proof, maybe even more than any other kind of retail business. With smart management on your part, you can generate strong sales from your liquor store, even in difficult times.

People will keep on buying alcoholic beverages, even in difficult times. Liquor sales stayed solid through the economic downturn of the mid-1980s, and they’re holding firm in the current economic market. People still regularly buy wine, liquor and beer, even when times become really tough. But let me add the following thought:

Currently, people are spending carefully. The days are gone (or at the very least, they’re on hold) when most consumers would think nothing of paying $40, $50 or more for a bottle of wine to go with their evening meal, but don’t worry, that trend positions you to keep your profits strong, because:

The liquor business allows you to adjust and adapt to customer purchasing patterns. You can offer an extensive variety of exceptional lower-priced products that appeal to customers today. If you’re an imaginative merchandiser, you can stock your stores with an innovative array of lower-cost wines, beers and other alcoholic beverages, ensuring your customers get good value for their money and never feel deprived. After all, they can still enjoy the adventure of buying and drinking interesting products, while saving money too! Just keep in mind that you have to shop intelligently for these products, while not forgetting to:

Supercharge your profits with low-cost, effective marketing. You can make a $30 profit on a case of economically priced Chilean wines, vs. $10 on a single bottle of more expensive French wine - and the marketing costs are the same for either selection! With good quality low-priced marketing (through sales flyers in community newspapers, or via an email newsletter that you send out to your preferred customers), you can sell quite a bit more products in these difficult times. Your customers will value you as an individual and the superb value which you deliver. You can easily increase your perceived value even more by implementing this next strategy:

Use top notch service and advice to maximize your sales. More customers today are searching around for alcoholic beverages that are low cost, yet still great quality. (This can be summed up with the simple word, “Value.”) This spells opportunity for you, the new owner of a liquor store. You can study wine yourself, hire top notch salespeople or just order selectively from the low cost wines that you see listed in popular trade magazines. Just don’t forget to lure in customers with some creative marketing strategies, such as sending your customers classy email newsletters that include specific discounts for selected products.

There are no small retailers, only retailers with small ideas! If you’re looking for a flexible, resilient business that will bring in solid profits in the current recession, and make even more money when the current recession goes away - look no further than a liquor store!

Richard Parker is the President and founder of the prestigious Diomo Corporation - The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream of buying a business.