Many business owners have trouble determining price their business for sale. That is partly due to the fact that there is no magic formula that can be plugged in to determine the real "value" of a business. A business' value is decided as a result of several different things including the type of business involved, its tangible assets, and those assets that are intangible such as existing contracts, vendor arrangements, customer lists, intellectual property and much more. There are multiple ways to assess a business' value. However, following the steps below should help you determine a selling price for your business.
Instructions
Determine a Selling Price for a Business
1. Determine if you want to sell everything or only pieces of the business. For example, sometimes business owners want to keep certain pieces of equipment, furniture, or existing cash on hand. In order to lure a buyer into the business, you must be clear about what is and is not for sell as part of the business.
2. Prepare a list of everything that you are willing to sell as a part of the business.
3. Determine the value of the tangible assets of the business. This would include things such as property, equipment, supplies, inventory, and anything else that the business owns that has a tangible value. If you are not certain of an item's real value, contact the manufacturer of the equipment or inventory to ascertain what they would charge for a like replacement.
4. Determine the value of the intangible assets of the business. This would include things such as existing contracts, regular customer lists, intellectual property, cash on hand, accounts receivable, reputation, cash flow and any other intangible asset that is a part of the business. These can often be much more difficult to determine. Cash on hand and accounts receivable are pretty clear. But while existing contracts should be pretty cut and dried (they are worth whatever the customer has agreed to pay based on receipt of appropriate product) and intellectual property has a cumulative value (based upon its uniqueness in the marketplace and growth potential), things such as an existing customer list can be difficult to value. This is an area where many owners and buyers clash because buyers often don't see the light of the owner's asking price. Therefore, this is an area where owners may have to build in some "give."
5. Consider asset based valuation. This method uses the valuation that you have determined for your business's assets in Step 3 and 4 above.
6. Consider a replacement value approach. This is somewhat similar to an asset based approach except for the fact that it does not take into consideration intangible assets. Instead, it takes into consideration only those assets that the business would need in order to begin from scratch. If the tangible assets are up-to-date and in good condition, this can be a useful approach. However, it can be an unsuccessful method for businesses that have old or outdated assets that may need to be replaced. In those instances, an adjustment might need to be made in the asking price in order for asset replacement.
7. Consider the market value of the business. Market value is the price that "similar" businesses in the same area have been able to obtain. While there will be obvious changes with regard to tangible and intangible assets between businesses, the similarities at least provide a starting point. It also gives the owner an idea of what the market may or may not be willing to bear.
8. Consider a valuation dependent upon the earnings of the business over a period of time such as the past five years. This way of valuing a business is much more successful for certain types of businesses that don't have a lot of tangible assets on hand. It is based on the actual financial history of the business, taking into consideration accounts payable and receivable, cash flow, and net profit or loss.
9. Consider a liquidation value approach. This isn't highly recommended by owners who want to get the best value for their business. However, when a business has been on the market for awhile, without selling, it may become a last chance approach. In this method, the owner must redetermine the value of the business' assets if he were forced to sell off the assets individually within a limited amount of time (six months to one year). Sometimes, the real value is the same either way, but in some cases, the value can be considerably less because of the time consideration.
10. Consider income valuation. This method assumes that future income will exactly or nearly mirror historical financial data. For that reason, this approach isn't always popular with some buyers. It makes too many assumptions and doesn't take into consideration changes within the industry, economic conditions, fluctuations in the customer base, possible inflation or a wide number of other typical business considerations. Many buyers steer clear of businesses that are valued using only this method.
11. Consider hiring a valuation consultant. If you don't feel comfortable with the value that you have established for your business, you may want to contact an expert in the field and have him either go over your chosen formula or begin his own valuation from scratch.Once a valuation is arrived at by a professional you can, of course, compare that against your own to determine which - - if either - - approach you want to take. Another option is to decide somewhere between the two opposing values.
12. Develop a back-up plan. If your business remains on the market for a long period of time, you may need to rethink its valuation. It is, therefore, best to have a back-up approach decided upon before it is required.
