For Successful Business Loan Application Get An Accurate Business Valuation
Below is a MRR and PLR article in category Finance -> subcategory Loans.
For a Successful Business Loan Application, Ensure an Accurate Business Valuation
Summary
If you're planning to acquire a business and need a loan, it's essential to ensure the price quoted by the seller is fair. An accurate business valuation can help determine this and identify any bargaining potential. This article introduces the basics of valuation before you pursue commercial business loans.
Why You Need to Understand Business Valuation
You might wonder why it's important to understand valuations. You might prefer to hire a professional or let the bank handle it. However, without evaluating the business's potential yourself, you risk overpaying. Ensuring the offered price aligns with your estimates is wise?"even if a professional valuation is involved.
A thorough understanding of the business you're purchasing, along with its valuation, will impress lenders and show you're knowledgeable and prudent.
Preliminary Steps for Accurate Valuation
Visit the Facility
Seeing the business in action is invaluable. Schedule a visit with the seller and then return independently to assess the real situation beyond the numbers.
Consider Professional Help
Hiring a professional for valuation is crucial. If you forego this, at least consult an attorney for assistance with the sales contract to avoid any legal pitfalls.
Request Financial Information
Insist on the following documents:
- Financial statements for the past three years
- Corporate tax returns for three years
- List of capital assets
- Equipment inventory
- Accounts receivable and payable aging
- Inventory details
Research Comparable Businesses
While a professional may provide information, be proactive. Use online forums, articles, and industry experts to assess prices of similar businesses.
Understanding Valuation Methods
Here are key ratios to consider:
- Price to Sales
- Price to Earnings (Net)
- Price to Cash Flow or EBITDA
- Price to Book
Common Valuation Methods
1. Adjusted Book Value: Based on business assets and liabilities.
2. Asset Valuation: Considers inventory and improvements to the business environment. It may include discretionary cash from the adjusted income statement.
3. Capitalization of Income Valuation: Focuses on intangible assets, excluding physical assets.
4. Capitalized Earning Approach: Uses expected earnings return rates.
5. Cash Flow Method: Determines how much loan the business’s cash flow can support, equating this to the business's value.
6. Cost to Create Approach (Leapfrog Start-Up): Used when buying a functioning business to save start-up costs and time.
7. Discounted Cash Flow: Discounts future earnings to account for growth, inflation, and risk, based on the premise that today's dollar is worth more than tomorrow's.
Ensure clarity on the valuation method used and its justification. Understanding this reasoning is crucial for assessing personal risk.
For more on valuation methods, look out for my next article.
You can find the original non-AI version of this article here: For Successful Business Loan Application Get An Accurate Business Valuation.
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