Q: How can I determine if the business I’m looking to buy is properly valued?

—Interested Investor
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A: Dear Interested:

When buying an existing business, determining the true value of the operation is one of the most important factors. In fact, every single other factor about the business can be totally perfect, but if you pay the wrong price, you could be setting yourself up for disaster.

Many times, a seller will come up with a totally unsubstantiated sales price just to test the waters. Other sellers base the price on a hidden motive: to pay off their own debts, to pay for their kids’ college education, or as part of an upcoming divorce settlement. All of these factors have no bearing on the true value of the business.

Keep in mind that the seller’s initial asking price has nothing to do with a proper valuation—that’s on you. A Family Business Lawyer™ can help you figure out how the company’s tax and legal liabilities fit into the value equation, and then we can refer you to valuation experts we know and trust to help with the other areas.

If you are buying a business, consult with your Family Business Lawyer™ to ensure the company doesn’t have any hidden legal liabilities that might affect its value.