In most successful business transfers, the business owner has taken the time to lay the groundwork for a clear plan to prepare for the sale of the business and ensure shareholders get full value for the company. One of the most pro-active steps in this plan is conducting an independent and objective business valuation to establish a realistic and fair picture of the business. This is the smartest thing a business owner can do because it protects them but also the transaction. What happens when a pro-active buyer approaches a business that decides not to conduct an independent and objective business valuation?
In contrast, prudent buyers want to make certain they are buying a business that meets their personal and corporate objectives. If you are a buyer (investor, corporate or individual) and are thinking about buying a business, it is prudent to conduct an independent and objective business valuation. Requiring the seller to open up their financials and business operations to a due diligence investigation, in an effort to pinpoint the fair market value, is a legitimate request. Should the seller frustrate this process, then there is something they are most likely attempting to hide - buyers beware!
Beyond due diligence, another reason buyer's should have a professional business valuation performed is to satisfy commercial lending requirements expected by banks. When a buyer requests bank financing to acquire an existing business, some banks will expect a price and consequent loan justification, supported by a business valuation. If property is involved, you can be assured a valuation will be required from a registered property valuer.
There are a variety of reasons why business owners sell their companies. It is important that individuals, companies or investors seeking to acquire a company conduct due diligence investigations into the business entity, the existing owner, and that owner's history whilst operating the business.
While financial performance is the primary component analyzed by a informed business buyer, it is critical that other factors be examined and considered when buying a business. Due diligence and going the extra mile can make the difference between buying a winner versus buying a cat-in-a-bag.
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