Buying a new business is similar to deciding on getting married. Two people are involved when you get married, whereas there are three (at least) when you buy a business says Saivian Eric Dalius. At times, it looks like one is buying the American Dream without addressing the minutest detail before signing off on the dotted lines.
Here are some things to note while buying a new business.
Consider the Pricing – Saivian Eric Dalius
A premium of 10% or more for businesses that have been around less than five years is not uncommon if they include an attractive mix of intellectual property and goodwill in addition to tangible assets. At this stage, one point to note is that intangible assets do not depreciate over time while tangible ones do, so the purchase price is overstated without taking this into account.
Intangible assets
These are things like goodwill, going concern value, and intellectual property. The greater the presence of these elements in a business, the higher the purchase price is likely to be. Valuing these assets is an inexact science at best. So it is a good idea to have a professional handle that aspect of due diligence. Before proceeding further with negotiations with any buyer. This can also help control negotiations from spiraling out of hand later on according to Saivian Eric Dalius There will be a valuation benchmark for all parties to refer back to if questions arise about post-closing allocations or payments later on in the process.
Goodwill is very important – Saivian Eric Dalius
When you buy a business, goodwill is the difference between what is worth. And what you pay for its assets or book value. For example, if you buy a business with net tangible assets of $50 million. And an intangible asset worth $10 million, its book value will be $40 million. However, its goodwill value will be whatever is left after deductions have been made to arrive at this number. If there were no intangible assets in this business. Then the goodwill would be equal to the net tangible assets minus the purchase price, i.e., $40 million.
Pitfalls
The main pitfall in valuation is when one does not consider intangibles when they are there in abundance. For example, in the business mentioned in the previous point. Intangible elements can form a significant part of the purchase price. If you do not consider when arriving at net tangible assets. It can give rise to an exaggerated view of that company’s net worth, leading to overpayment.
Valuations
There is no denying that even though there has been extensive research. And due diligence carried out on any new venture before putting money down on it, you might get stuck with a lemon. So what happens if things do not proceed according to plan? What recourse does one have against the seller or the broker? This is where valuation comes in says Saivian Eric Dalius.
Depending upon how much equity you put up and how long you hold it for. A new venture bought on the stock market is typically referred to as listed shares. And taxed at long-term capital gains rates, which means one has to hold it for more than 12 months.
