When a person is considering whether to sell or purchase a company, how the business’s value is determined can be an important process. People often have a misunderstanding of how their business will be valued by prospective buyers.
Much more goes into valuing a business than just the business’s annual revenues and annual net income. Projections of future growth and improved margins also factor in significantly. Another important factor is the business’s EBIDTA, which is an acronym that refers to earnings before income, depreciation, taxes and amortization. Buyers will not only consider the EBIDTA of a target business but will also consider the margin created by dividing the EBIDTA by the company’s revenue, considering projections based on improved efficiency and its potential percentage increase.
While current revenues are certainly important, buyers often consider growth projections in the event of a market downturn. Tax implications of any purchase and the amount of debt needed to finance the buyout are also important. Finally, buyers normally consider ownership and what it might mean when valuing their prospective purchase and making an offer.
In addition to taking these figures into account, entities that might be considering the sale or purchase of a business might discuss their potential transactions with an attorney. That attorney could help the client conduct due diligence, evaluate the business’s earning potential in the future and vet any offers from other parties. During negotiations regarding the transaction, the attorney might also be able to provide representation, asserting and protecting the clients’ interests during any interactions with the other party.