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Business Valuation: Lending to the buyer of a business

Business valueYesterday I got an email from a lender/client of mine. Her borrower is buying the business and she is trying to assess whether the purchase price is in line.

Check these resources to better understand how businesses values are set:

The Journal of Accountancy suggests www.go-iba.org/ for a discussion group of Institute of Business Appraisers members.

A search on the internet found two more:

http://valuationresources.com/Misc/ValuationMultiples.htm which is interesting. I cannot vouch for them at all, but it gives you an idea of the variation among industries and if you think you’ll have enough use for it, gives you a report you can purchase that covers many industries.

http://www.novarsgroup.com/prep-plan/worth.html#aa gives a primer on business valuation and some possible formulas.

The short answer, there is no general rule that applies to all industries. Understanding how businesses are valued by the professionals and then discussing how the buyer chose their value will help you assess whether the buyer has done their homework.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.