A
Simplified Business Valuation Method That Will Help You
Sell Your Business Faster And For More Money
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show you how to set the best possible asking price for your
business
Step
2 - Business Valuation
The
business valuation is the source of more misunderstanding and
frustration than any other element of the selling process.
There
are guidelines, rules-of-thumb, methods, multiples, evaluations
and an nonstop stream of expert advice, but there is no
single accepted method that will work for every company.
The
good news is that you don't need to become an expert in
business valuations in order to sell your business. In this section
I will try to give you some basic guidelines that will work for
the majority of small businesses out there.
When
applying different valuation methods to your business, the goal
is not to determine a selling price but instead to develop
a price range. No single calculation can give you the perfectly
correct price for your business because ultimately, your business
is worth what a qualified buyer will to pay for it. Since we can't
know what that amount is ahead of time, the best approach is to
come up with an price range as a starting point.
I
am going to show you how to do this by using one valuation approach
- The
Multiple Of Cash Flow Method. Then, by adjusting the variables
that are part of the calculation, we can get a ballpark price
range from which to begin the negotiations with a buyer.
And
that is all you can hope to get from any valuation method - a
place to begin. Buyers (and their accountants) will have
their own way of placing a value on your business and it will
probably be quitedifferent than yours. The ultimate
selling price of your business will then evolve through the natural
give and take of the negotiation process.
The
true value of a business will be based on its ability to generate
profits for its new owner. I recommend the Multiple Of Cash Flow
Method because it is based on your company's track record of generating
profits
If
your business is new and doesn't have much of a track record,
or your business has been losing money, you may be better off
using the Asset-Based
Valuation Method .
If
business valuation is a completely new topic for you go first
to: Business
Valuation Terminology for definitions of common terms related
to business valuations.
Other Factors
That Affect The Selling Price
Whatever
method you use to come up with a value for your business, the
actual selling price will be affected by a variety of issues.
Obviously, the health of your business and the general economy
will both have an impact. So will these factors:
1.)
Terms: The selling price a buyer agrees to pay will likely
be affected by the financing terms you offer- or the lack of them.
Most small business sales include some type of seller financing.
Many owners offer to lower the overall sale price in exchange
for the buyer paying all cash up front - but most times
it's hard to find a buyer who has enough cash to do this. On the
other hand, if you can offer the buyer attractive financing terms
you will be better able to hold the line on the selling price.
Also, offering to finance the sale will certainly increase the
size of the pool of potential buyers thereby making it
easier to sell and easier to get a better price.
2.)
Type Of Buyer - Some small businesses are bought by investors
who will hire a manager to run things; and some are bought by
strategic buyers who will absorb your business into their
existing operation. But most small business buyers are individuals
that want to work in the business and pay themselves a salary.
Therefore, whatever price and terms you and the buyer agree upon,
the business will have to generate enough profits for the buyer
to pay himself a reasonable salary, make monthly payments on the
money he borrowed and have enough left over to reinvest in growing
the business.
3.)
Personal Needs - Health, divorce or other personal issues
may force you to sell. If so, you may be inclined to offer a very
low price up front. However, I would suggest you not get too generous
too soon. Even if you advertise a low price up front, buyers will
still want to negotiate down from that low starting point.
Better to follow our advice here and come up with a reasonable
price range to start. Then you can come down off that price as
needed. But if you start out at a rock bottom price, you leave
yourself nowhere to go when the buyer makes the inevitable
(and lower) counter offer.
