Nyakundi Report archive: published on 20 November 2018.
Anyone shopping for an existing business is usually asked to name a price. The source article says that is the hardest part of the deal, because a buyer cannot judge value properly without first studying the business.
The basic test is whether the purchase price is justified by what the company actually contains. That includes the assets, the liabilities, and the wider condition of the operation before any agreement is signed.
Start with due diligence ¶
The article places due diligence at the top of the list. A buyer is advised to review the business’s financial position, legal status, accounts receivable, equipment, and other assets before making an offer.
It also says outside experts can be useful where the buyer lacks the knowledge or resources to assess the deal properly. Reputation is part of that review as well. The source recommends checking with vendors, customers, and suppliers to see whether the business is in good standing and whether those relationships are likely to continue after a takeover.
What the sale should include ¶
The seller is expected to provide a clear list of what is being sold. According to the source, that list may cover inventory, buildings, land, equipment, the business name, employees, customers, vendors, suppliers, and intellectual property.
Equipment should be checked closely. The article says the buyer should confirm the date of purchase, model, maintenance schedule, and operating condition so depreciation can be estimated. Inventory also needs scrutiny, especially where stock may be obsolete or perishable. Receivables should be tested for collectability, and any disputes should be identified before the deal moves forward.
Liabilities can change the outcome ¶
The source warns that liabilities can alter the value of the purchase in a serious way. A buyer should know who will be responsible for business loans and other debts after the takeover.
In the worst case, the article says a lender may be able to seize assets if debts are not paid on time. It also advises buyers to ask whether the seller has signed earlier agreements that could affect the value of the assets or limit the buyer’s freedom of action. If those obligations are too restrictive, the safer route may be to buy only the assets rather than the whole business.
Market value and location matter ¶
Market value is another part of the calculation. The article says a buyer who has already reviewed listings in the target area can usually estimate a realistic range for an offer.
Location also affects price. Businesses for sale in Los Angeles or other major cities in California will often command more than similar businesses in the middle of the United States. After factoring in location, the buyer can move to an assets appraisal to determine the business’s true value. The source also recommends checking accounts receivable closely, especially where the company handles many customer accounts.
A trial run can reveal more ¶
Before signing the purchase agreement, the article suggests asking the owner for a short trial run. That can expose details that simple questioning may miss and give the buyer a better sense of sales and profits. If the seller agrees, the source says it may also show that the buyer is serious.
Buying shares carries both sides of the business ¶
The article closes by noting that buying shares in a business gives the purchaser a stake in both the assets and the liabilities. Depending on the arrangement, the buyer may take an active management role or become a silent partner.
It also points to the need for a final affordability check. If the price still does not work after valuation and negotiation, the buyer should move on and assess the next opportunity using the same process. The source links one of its valuation examples to a 2012 reputation reference, underscoring that reputation and value are not separate questions when a business changes hands.
