If this is your first time buying a business, you probably have some unanswered questions about how to evaluate potential options before you agree to anything. After all, becoming a business owner is a big investment—maybe the biggest you’ll ever make, aside from purchasing a home. So if you’re shopping around for the best deal, you’re probably going to need some tips on how to evaluate a San Jose business for sale. Know that there’s more than one way to assign value to a business, but here are some of the main options you have when it comes to deciding if it’s worth the cost.

Look at Revenue

Although this might seem like the most obvious way to access a company’s true value, it’s actually a crude formula. This is because revenue doesn’t necessarily mean the same thing as profit. A business might bring in $10,000 per month, but remember that doesn’t tell you what it actually costs to keep it afloat.

Businesses are often sold for some multiple of their revenue, depending on the industry. It’s also important to note how stable that flow of revenue is. Is it seasonal? Does it have peaks and dips? This is essential information to understand when you’re considering a San Jose business for sale.

Discounted Cash-Flow Analysis

This is the option that the business tycoon and billionaire Warren Buffett prefers. The idea is to look at how much cash a business generates on a yearly basis. You then insert that figure into a math formula using the long-term Treasury bill interest rate. It’s a little complicated to get into in a quick blog post, but if Warren Buffett stands by the discounted cash-flow analysis, it’s worth considering long before you ever need business escrow services. Use an online NPV calculator to simplify the process.

Use Earnings Multiples

Have you found a San Jose business for sale that you’re thinking about buying? Another option is to figure out a company’s price-to-earnings (P/E) ratio. You can then estimate its earnings for the next few years. What you do next is multiply the businesses P/E ratio by its projected earnings.

Don’t Overlook Other Assets

Are there other things of value on the table? For example, maybe you’re getting into an industry that requires specialized equipment to stay in business, like a bakery. Be sure to add up other things of worth that are included with the sale of the business, such as any inventory or equipment that you would otherwise need to invest in on your own. Although, it’s also important to remember to subtract any outstanding debts as well.

Do You Need Business Escrow Services?

As you can see, there are a few different ways to get to the bottom of a company’s real worth. You may also want to think about things like where the business is located.

If you need a business escrow account, contact us at Bay Area Escrow by calling (925) 831-9099. We’re happy to answer any questions you have about commercial escrow services.