New Business Ventures

People setup or purchase a business for many purposes but the most common reason given is to make money.

Businesses can be valued on an asset basis or a profit earning basis or a combination of the two. The basis of valuing the business is dependent on what the business actually does.

How much should you pay for the business?

The ideal purchase price for a business is one where the future net profit after tax recoups your purchasing price in the minimal amount of time. Generally speaking you should be able to recoup your purchasing price within your first three years of trading.

A review of the last three trading records of the business should be undertaken. In this review any expenses of a private nature should be excluded and the trading figure should be verified against the source records of the business.

After determining the average after tax profit for the last three years it is necessary to determine if there are any external factors that will affect the future performance of the business. External factors that may affect the future performance of the business you are purchasing are:

  • Do the sales reflect reliance upon a few businesses
  • Would a change in Government legislation have a dramatic affect on the future sales of the product or service being sold
  • Are there any businesses considering entering the same market
  • Are there any environmental factors that could lead to a significant increase in the cost price of manufacturing the good
  • Does the purchaser have the expertise to manufacture or sell the good or service?