There are two ways to determine how much existing business costs: calculate it yourself or order a calculation from appraisers. When calculating, professionals make assumptions for building future cash flows, discount them at the WACC rate, and only then calculate EV – enterprise value.
What affects the price of a ready-made business?
Among the factors that affect the cost of a finished business project, it is worth noting:
Supply and demand
The value of a business directly depends on the quantitative ratio of potential buyers and companies offered for sale. The relationship between supply and demand can increase or decrease the price of a company by 15-20%. In 2003, the service sector enterprises, public catering, and food business were in the greatest demand. For example, investors were willing to pay between $30,000 and $200,000 for a beauty salon that generates minimal or no income.
Companies that do not require specialized training sell for more than those that need technical skills and therefore have a limited buyer market. Although, for example, many buyers regard car washes as enterprises whose development does not imply any original marketing moves, one often hears the phrase: “The main thing is to buy detergents on time, and the client will go himself.” Guided by this logic, investors are sometimes willing to pay more than 30 of their monthly profits for a car wash.
For many buyers, the deal’s lack of risk or dark side justifies the higher price. Paradoxically, an investor is willing to pay more for a company with a white book, although its income will undoubtedly be lower than that of a gray counterpart. Another example is network companies. They are characterized by increased liquidity – their cost is 15-20% higher than that of enterprises similar in income. This is explained by the lower risks associated with the acquisition of networks: the company will not incur a significant loss if there are problems with renting one of the points or if a competing organization opens nearby.
Availability of assets
As already mentioned, when determining the value of a business, the income it brings is of key importance. If the company has high-tech, expensive equipment with long useful lives and real estate, the liquidation value of these objects is added to the cash flow value. However, the cash flow remains the determining factor, and the equipment is considered a tool without which it is impossible to obtain this cash flow. The same elements are trained staff and customer base. In exceptional cases, goodwill can be taken into account, but for this, the company must have some great intangible assets and sell its products or services at a price higher than the market price.
Just as a seller may be emotionally attached to their business, a buyer may expect a company to meet certain non-financial criteria. Therefore, an investor may be willing to pay more for a business that will satisfy him, in line with certain personal values and ideals.
How strong is the seller’s desire to sell the business? How strong is the buyer’s desire to acquire the company? The presence of compelling personal circumstances, ranging from unemployment to illness and death, can seriously affect the value of a business. The buyer should always pay special attention to the reason for the sale – after all, it is possible that the store is being sold because a supermarket is being built nearby.