How to Determine the Offer Price of a Business

Finding a business to purchase should be the final step in a process that begins with self-evaluation and a sound financial assessment. Obviously, before buying a business, you'll need to determine what type of business you are qualified to run and would enjoy owning. Based on your own skills, technical knowledge, abilities, interests, and personality, you can determine which type of business will provide you with the best opportunity to use your talents most effectively and turn a profit.

Once you have determined what type of business is best for you, it's time to start your search. One of your first considerations will be location. Consider how far your business should be from your home, and whether you want to own a business in another location and have others handle the day-to-day activities.

Along with considerations about location, you need to determine how much you can afford to spend. Once you have an idea about where to look and what your budget is, start by reading local newspaper advertisements under the Business Opportunities heading. In most metropolitan areas, the Sunday papers will have a large listing section. You can also check online business-sale listings at Web sites like BIZBEN.com or BizBuySell. Conversely, you can also place an ad stating that you are looking to purchase a specific type of business.

If you're considering making an offer to buy a small business, whether it be where you work or where you patronize, you may be wondering how much to offer. The first thing you need to do is hire an accountant or a business broker with strong accounting skills to perform a valuation.

Much like real estate, you need to have some comparables. Research how much similar businesses have sold for, or might sell for, in your area. A good local business broker may already have this information.

In performing the valuation, the accountant or broker will apply a "multiple" — common to your industry — to either the revenues or to the profits in order to determine the value. You would then establish a purchase price based on the comparables and the valuation. You or your broker will then present this information to the current owner to back up your offer. The rest is negotiable from that point on.