By far the biggest part of the purchase price of a small family business is goodwill. So it is vitally important to a buyer to have knowledge and understanding of just what goodwill is and how to place a value on it.

This is the fourth in a series of articles on valuing goodwill and discusses the factors that affect your bargaining position.

Demand and Supply

You will pay a lot less for a small retail or service business in a small country town than you will in the city. It’s not that you won’t make the same money – you may make even more because of cheaper rents and higher selling prices – it’s that nobody wants to live there except the locals.

This is demand and supply, and in this case the supply exceeds the demand. This puts you in a strong bargaining position if you are prepared to move. But just remember you are going to be in the same position as the seller if you want to sell out later.

The opposite is also true. A limited number of distributorships may be available for a hot new line of products or services that is all the rage. More people want them than the number that is available. Demand exceeds supply, and people may pay crazy excessive prices.

Most situations are not as dramatic as these examples. But some types of businesses are not popular because of their nature (funeral parlours, carers), the non-family friendly hours (night times and weekends), the physical requirements (couriers), extensive travel (commission agents) etc etc.

There are no hard and fast rules here. But you can definitely offer less than the calculated value with a good chance of success. How much less depends on the circumstances.

The Owner is Desperate to Sell

Sometimes you can get an indication of this by how long the business has been on the market and how much the price has come down.

The desperation may be financial (they owe money all over the place), personal – divorce, a family tragedy – or family illness, mental or physical.

Or the business may be going broke, or they know something you don’t.

In other words, be careful you don’t get conned! They may be setting you up.

If it is true, it’s an opportunity for a bargain.

The Specialized Nature of the Business

Some businesses require the owner or at least an employee to have certain qualifications or experience or licences to conduct it. Trade qualifications are a good example – for instance, a plumber.

Only a plumber can buy a plumbing business – unless of course you employ one, but that puts you at their mercy.

If you do have the right qualifications, make sure you check out and value the business properly first. Then, if everything is OK, make your (low) offer.

Because the vendor knows and you know that you could just as easily start your own business with a good chance of success, you need a persuasive reason to buy it.

This could be regular written maintenance contracts with large condos, or a very solid customer list. These are definitely worth paying for.

In their absence the ABG could be discounted by as much as, say, 75%!

Availability of Finance

From time to time banks go through periods where they tighten up on finance to small business. This can be because of a Government “Credit Squeeze” to try and reduce inflation, or the banks have been stung by big losses through corporate collapses, etc.

Whatever the reason, if the banks aren’t lending, there will be fewer buyers.

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

August 25th, 2009 | Tags: availability of finance, bargaining position, business valuations, buying a business, checking out a business, components of goodwill, definition of goodwill, demand and supply, diy business valuations, due diligence on a small business, goodwill valuation, how to buy a business, how to value a business, the owner is desperate to sell, tips on buying a business, valuing franchises, valuing goodwill in a small business, valuing specialized businesses | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |