Are you looking for an avenue to financial freedom but don’t want to spend years creating and building a business from the ground up? Then you’re in the market for a business for sale. If this is you, you may be wondering, “Is buying an existing business better than starting one?” After all, there’s still risk involved. What happens if you invest more in a business than it’s actually worth?
To help you find the best match for your interests and goals, we’ve put together this guide on how much to spend when buying a business and where you can find businesses that have proven their worth.
Why Would Someone Buy an Existing Business?
Buying a business can provide a buyer with the financial freedom of owning their own business without needing to start one from scratch. Here are some of the advantages of buying an existing business over starting your own:
- Financial Freedom: As a business owner, you’ll have control over how much you work, and your income will be capped only by your ambition—not a salary.
- Less Risk: You don’t need to come up with a service or product that might fail—instead, you can buy one that customers already love.
- Proven Business Model: From the equipment you need to the size of your team and which software you should use, someone has already figured this out. You can see what works and tweak the model from there, but you won’t have to start from scratch.
- Established Brand Identity: Customers will already know who you are and the value you provide, so you can hit the ground running instead of spending precious time going after leads and convincing people to do business with you.
How To Calculate the Value of a Business for Sale?
When calculating the value of a business, you can use various methods, including valuing assets, calculating revenue floors and ceilings, and doing a discounted cash-flow analysis. Let’s take a closer look at how to use the methods and what information they communicate:
- Valuing Assets: For this calculation, you can get an idea of the risks of buying a business by comparing its assets to its liabilities. Assets include the physical properties of a business, like the building, property, equipment, and proprietary technology, as well as financial aspects like cash and accounts receivable. Liabilities are what the business owes, such as its debts, accounts payable, and deferred revenue. The equation for this method is:
Value = Total Assets – Total Liabilities
The higher the value is above zero, the less risky it is. The lower the value, the more you’ll owe on your first day owning the business.
- Revenue Floors and Ceilings: As a forward-looking valuation of a business, this method focuses on multiples of the business’s annual sales revenue. With this calculation, you can determine the most a buyer should pay for the business and the least the owner would be willing to sell it for. As a rule of thumb, the calculations for the price floor and ceiling are:
Price Floor = Annual Sales Revenue X 1
Price Ceiling = Annual Sales Revenue X Multiplier
The multiplier varies per industry. For example, when valuing a hardware business, you would multiply their annual sales revenue by 3.35, and for a construction company, you would multiply their annual sales revenue by 1.09.
- Discounted Cash-Flow Analysis: This analysis assigns a present value to the business based on expected future cash flows with a discount rate applied. The discount rate accounts for the fact that a dollar today is worth more than a dollar you’ll get several years from now because you’ll have the opportunity to invest it (or it’ll lose value to inflation). In order for this valuation to work, you’ll need to have a decent forecast of what the business’s cash flow will be for the next few years.
Step 1: Determine the value of the cash flow for each future year you’re considering with the discount rate applied. For the discount rate, use the rate of return on your other investments. For example, if you could earn 5% by investing more in your portfolio, use 0.05 as your discount rate. Depending on how many years you want to account for, you can extend the equation. For a single year, the equation looks like this:
Discounted Cash Flow = {(Cash Flow for Year One) / (1 + Discount Rate)^1}
Step 2: Add future years into your forecast. For additional years, the equation changes slightly:
Discounted Cash Flow = {(Cash Flow for This Year) / (1 + Discount Rate)^(Year Number)}
Step 3: Put it all together. To find the discounted cash flow for several years, add the results for each individual year together. This example calculates three years ahead:
Discounted Cash Flow = {(Cash Flow for Year One) / (1 + Discount Rate)^1} + {(Cash Flow for Year Two) / (1 + Discount Rate)^2} + {(Cash Flow for Year Three) / (1 + Discount Rate)^3}
While each of these methods offers a unique perspective on a business’s value, none of them capture the entire picture. It can often be helpful to take multiple valuations into account when deciding to buy a business, and you should also consider the value of qualities that are more difficult to calculate like location and brand recognition.
Creative Ways To Buy a Business
For a creative solution to becoming a business owner without building one up from the bottom, consider buying into a franchise. With a franchise, you get all of the benefits of buying a business but on a much larger scale. For example, instead of buying a business that has an established brand identity in only one town, your franchise brand could be recognized by anyone driving by your location from anywhere in the country.
Value and passion are the two most influential factors when determining which business to buy. You already know what you love doing, so we’ll help you figure out how much you should pay when buying a business.
How Much Does Buying into a Franchise Cost?
When you buy into a franchise, determining how much you’ll spend is a lot more straightforward—you just need to browse our directory at Franchise.com to see which franchises are available and how much cash you’ll need to get started. To help you begin with your search, let’s take a look at a few different price ranges and an example of a franchise that you’ll find in each:
Up to $25,000
- Mattress By Appointment: With $20,000, you can get started with a turn-key business—without any additional franchise fees, setup fees, or training costs. By putting in 25 to 35 hours per week, you can earn between $75,000 and $150,000.
Up to $50,000
- ClaimTek Systems: Medical and dental billing services are in demand and require no prior experience in the industry. For a total investment of as little as $25,000 to $50,000, you can get started in this industry with the aid of training, marketing materials, and ongoing support.
Up to $100,000
- Bruster’s Real Ice Cream: Owning your own business can be sweet—especially when serving up smiles with a cherry on top. Bruster’s requires franchisees to have $100,000 in cash to get started, and the total investment from the franchisee can range from $318,000 to $2,236,500. In return for their investment, franchisees have access to a wide range of resources like real estate broker connections, construction management, and grand opening plans.
Over $100,000
- Hounds Town USA: Love dogs? With $200,000 in cash and a total investment of $339,300 to $628,500, you can make your living running a doggy daycare that’s home to the “Happiest Dogs on Earth!” Here you can change the lives of dogs, their owners, and average a net profit of $342,257.
Find Proven Businesses at Franchise.com
When you buy a business, you want a return on your investment that grants you the financial freedom your current job can’t. In other words, you need to know that the business works. At Franchise.com, we provide prospective business owners with just that—businesses that have proven their worth in market after market and come with support for training, marketing, and so much more.
Ready to find out what your next chapter looks like? Get started by browsing our directory of franchises in your area.
