How much is my Business Worth?

[shopgirl]

I'm concidering selling my business but I don't know how to begin putting a price on it. Can someone please guide me?

[Grumpy]

We really need to know alot more info.

Whats your net for past 5 years.
Whats your gross for past 5 years.
Whats your taxes per year.
What kind of business.



Or look at all those factors, get your business appraised, and make your best judgement.

Is the area your in going up? or is it over priced and about to crash? Theres a ton that is involved with valuing your business.

[llcer]

I agree, you have to get a ballpark number for the questions below, and equally important, what is your projected revenue going forward.

[Maverick]

Pricing a SMALL business (under $1,000,000 annual income) really is rocket science. Considerable analysis has to go into [pricing a business for selling purposes.

Even though information on valuation methods abound, using them takes much more than pulling out your financial statements. Pricing a business to sell takes careful consideration of
* present earnings
* future potential
* Realistic goodwill (evidenced by REPEAT business and validated referrals)
* Current assets
* Average monthly - Annual income
* Net profit and total evaluation of business financial statements. The final analysis, "net profit," the bottom line.
* Expense & overhead to profit ratio
* ...and many other factors that business owners may not understand.

There things that small business owners MUST consider are:
1. The amount of money they are taking out of the business and not reporting as income. That money you may be paying someone under the table should be reported. Frequently, business owners overlook these expenses not remembering they are applicable to the value of their businesses.

2. They should have a realistic view of the potential of the business. They need to be objective about how strong a performer the business is in the market and the future of the company

This becomes more difficult when small family- owned businesses, or small business with feuding partners are trying to determine a price. Strong emotional ties to the business often cloud their ability to see it in a realistic light.

Many owners tend to oversimplify the process. Two businesses both netting $500,000 do not necessarily have the same value.

Some assume a business is worth as much, or more, as a competitor's that recently sold. Pricing is commonly (but wrong) determined by an arbitrary number deemed acceptable to retire for the next 20-25 year, not TRUE value.

Many small business sellers DON"T really understand the buyers perspective. The seller wants as much as he can get, but the value has to be supported by the business itself.

Buyers are investors. Sophisticated ones want a calculable formula showing ROI (Return On Investment). The process is easier to understand this way. If YOU the Seller were to buy an investment property, say a 10 unit apt. building, you would want to know ALL the financial aspects of your investment requirement opposed to your return.

A business requires more of an investment since the buyer is putting in both money AND effort which he/she considers to be a valuable commodity. THINK LIKE AN INVESTOR.

To derive that unknown value for a business, appraisers weigh the outcomes of many valuation methods. Appraisals can be expensive, because the complexity of the job commands professional guidance.
But, they may be considered cost effective if two Partner split and just can't agree on a price. The appraisal may be the middle ground to satisfy both parties. That's WHAT investors in real estate DO! Different investment, same principle! Then agree to accept the findings.

An appraiser doesn't rely on one method to determine a price. In fact, he uses several different methods before arriving at a final amount. They may use a combination of the valuation approaches, the Asset-based Approach, a Market Approach, and an Earnings Approach. This provides a more objective view of the company in different ways.

Selecting a business appraiser

Professional accreditation:
There are four organizations in the United States that certify business appraisers:

* The Institute of Business Appraisers (IBA)
* The American Society of Appraisers (ASA)
* American Institute of Certified Public Accountants (AICPA)
* National Association of Certified Valuation Analysts (NACVA), ,
The requirements of each are a bit different based on education and the backgrounds, but each organization will ensure the appraiser has been trained and tested.

These organizations require their designated members to have taken educational courses, attend national conferences, have their appraisal reports reviewed by a peer committee, and subscribe to a code of ethics and professional standards.

Verify Small-business appraisal experience:
Some appraisers tend to specialize in the larger businesses and may not have much experience in valuing small businesses. An appraiser who is experienced in appraising smaller business is important, especially when a businesses value is less than $500,000.

If the business is only a year or two old, has considerable assets, a decent income, and strong future potential, it really isn’t worth much now. Ask yourself, what would I be willing to pay (now) for this business. What’s it worth to me?

A final note

If this is overwhelming to you hire a qualified business consultant to "help you sell" this concept to your partner. If you plan to keep the business, and the other is leaving, a skillful negotiator may be effective in closing the deal, leaning in your favor, over your paying through the nose because you didn't know what to do.

They aren't cheap up front, probably $1,000 - $2,000 depending on what's involved (probable 7-10 hours work for them), but they may save you 10-20 times that in over payment and dramatically reduce tensions and grief. Sometimes you can get the 2 for 1 value, meaning your Consultant can make a simple appraisal that he can sell to the other partner.

He/she would likely consider (a simple but possibly acceptable formula in lieu of a complex formal appraisal)

Some SIMPLE valuation considerations:

1. Create a balance sheet showing all assets and liabilities (Will show cash value) Remember, the value of the assets is likely based on what you paid for them, not what you could see them for in a pinch (considering a quick sale, their present condition, and the current market conditions, buyers or sellers market) . This is a negotiation point.

If I sold ALL the assets at a "Quick sale" how much would I likely get?
2. What will it take to continue running the business in capital and time?
3. What is the business income potential over the next 5-10 years.
4. How much REAL goodwill is there? Considerable repeat business?
5. How's the local economy? Is this a "hot" business, slowly growing, or been sluggish?

The final TERMS of selling out. If you plan to keep the business (We'll call you the buyer here, buying out your partner), will your partner - seller, be reasonable. Can the business support a monthly to the seller. Will the business need time before it can afford another payment? Will the seller carry back his/her equity on a Promissory Note (UNSECURED)?

If your the Selling partner, are you willing to make terms manageable and realistic for the buyer. If you impose terms that are to strict, the business may go under and you will get nothing.


Hope this will give you some direction, stimulating what specific questions to ask for your next step.

Maverick

[powermarkman]

We really need to know alot more info.

Whats your net for past 5 years.
Whats your gross for past 5 years.
Whats your taxes per year.
What kind of business.



Or look at all those factors, get your business appraised, and make your best judgement.

Is the area your in going up? or is it over priced and about to crash? Theres a ton that is involved with valuing your business.

The questions above seem like a gr8 place to start!

[delusional]

Pricing a SMALL business (under $1,000,000 annual income) really is rocket science. Considerable analysis has to go into [pricing a business for selling purposes.

Even though information on valuation methods abound, using them takes much more than pulling out your financial statements. Pricing a business to sell takes careful consideration of
* present earnings
* future potential
* Realistic goodwill (evidenced by REPEAT business and validated referrals)
* Current assets
* Average monthly - Annual income
* Net profit and total evaluation of business financial statements. The final analysis, "net profit," the bottom line.
* Expense & overhead to profit ratio
* ...and many other factors that business owners may not understand.

There things that small business owners MUST consider are:
1. The amount of money they are taking out of the business and not reporting as income. That money you may be paying someone under the table should be reported. Frequently, business owners overlook these expenses not remembering they are applicable to the value of their businesses.

2. They should have a realistic view of the potential of the business. They need to be objective about how strong a performer the business is in the market and the future of the company

This becomes more difficult when small family- owned businesses, or small business with feuding partners are trying to determine a price. Strong emotional ties to the business often cloud their ability to see it in a realistic light.

Many owners tend to oversimplify the process. Two businesses both netting $500,000 do not necessarily have the same value.

Some assume a business is worth as much, or more, as a competitor's that recently sold. Pricing is commonly (but wrong) determined by an arbitrary number deemed acceptable to retire for the next 20-25 year, not TRUE value.

Many small business sellers DON"T really understand the buyers perspective. The seller wants as much as he can get, but the value has to be supported by the business itself.

Buyers are investors. Sophisticated ones want a calculable formula showing ROI (Return On Investment). The process is easier to understand this way. If YOU the Seller were to buy an investment property, say a 10 unit apt. building, you would want to know ALL the financial aspects of your investment requirement opposed to your return.

A business requires more of an investment since the buyer is putting in both money AND effort which he/she considers to be a valuable commodity. THINK LIKE AN INVESTOR.

To derive that unknown value for a business, appraisers weigh the outcomes of many valuation methods. Appraisals can be expensive, because the complexity of the job commands professional guidance.
But, they may be considered cost effective if two Partner split and just can't agree on a price. The appraisal may be the middle ground to satisfy both parties. That's WHAT investors in real estate DO! Different investment, same principle! Then agree to accept the findings.

An appraiser doesn't rely on one method to determine a price. In fact, he uses several different methods before arriving at a final amount. They may use a combination of the valuation approaches, the Asset-based Approach, a Market Approach, and an Earnings Approach. This provides a more objective view of the company in different ways.

Selecting a business appraiser

Professional accreditation:
There are four organizations in the United States that certify business appraisers:

* The Institute of Business Appraisers (IBA)
* The American Society of Appraisers (ASA)
* American Institute of Certified Public Accountants (AICPA)
* National Association of Certified Valuation Analysts (NACVA), ,
The requirements of each are a bit different based on education and the backgrounds, but each organization will ensure the appraiser has been trained and tested.

These organizations require their designated members to have taken educational courses, attend national conferences, have their appraisal reports reviewed by a peer committee, and subscribe to a code of ethics and professional standards.

Verify Small-business appraisal experience:
Some appraisers tend to specialize in the larger businesses and may not have much experience in valuing small businesses. An appraiser who is experienced in appraising smaller business is important, especially when a businesses value is less than $500,000.

If the business is only a year or two old, has considerable assets, a decent income, and strong future potential, it really isn’t worth much now. Ask yourself, what would I be willing to pay (now) for this business. What’s it worth to me?

A final note

If this is overwhelming to you hire a qualified business consultant to "help you sell" this concept to your partner. If you plan to keep the business, and the other is leaving, a skillful negotiator may be effective in closing the deal, leaning in your favor, over your paying through the nose because you didn't know what to do.

They aren't cheap up front, probably $1,000 - $2,000 depending on what's involved (probable 7-10 hours work for them), but they may save you 10-20 times that in over payment and dramatically reduce tensions and grief. Sometimes you can get the 2 for 1 value, meaning your Consultant can make a simple appraisal that he can sell to the other partner.

He/she would likely consider (a simple but possibly acceptable formula in lieu of a complex formal appraisal)

Some SIMPLE valuation considerations:

1. Create a balance sheet showing all assets and liabilities (Will show cash value) Remember, the value of the assets is likely based on what you paid for them, not what you could see them for in a pinch (considering a quick sale, their present condition, and the current market conditions, buyers or sellers market) . This is a negotiation point.

If I sold ALL the assets at a "Quick sale" how much would I likely get?
2. What will it take to continue running the business in capital and time?
3. What is the business income potential over the next 5-10 years.
4. How much REAL goodwill is there? Considerable repeat business?
5. How's the local economy? Is this a "hot" business, slowly growing, or been sluggish?

The final TERMS of selling out. If you plan to keep the business (We'll call you the buyer here, buying out your partner), will your partner - seller, be reasonable. Can the business support a monthly to the seller. Will the business need time before it can afford another payment? Will the seller carry back his/her equity on a Promissory Note (UNSECURED)?

If your the Selling partner, are you willing to make terms manageable and realistic for the buyer. If you impose terms that are to strict, the business may go under and you will get nothing.


Hope this will give you some direction, stimulating what specific questions to ask for your next step.

Maverick

That's a lot of information, Maverick! You seem to be kind of an expert in this field. What do you do for a living?

As others have said, please provide more information if you really want an estimate for the value of your business. Nobody is going to be able to value your business without any information.

[novasparker]

Business valuation is very difficult, which is why a lot of folks turn to professional appraisers in order to get a ballpark figure. Maverick has the right idea in that you will need at least the information points above to even get started figuring out how to put a price on your business. There are a lot of intangibles at work, meaning you have to value the potential of ongoing business, your brand and logo, and much more. My husband and I sold a business once and I will tell you that the valuation process was much more difficult than the actual sale. Good luck.

[pahagwl]

When calculating the net worth of a business, one needs to draw up a Balance Sheet of the business. Balance sheet is basically drawn on a certain date, with the values of assets, all kinds of assets (both liquid and illiquid) put against the value of liabilities the business has incurred and also the capital, which is the money invested by the owner himself. Basically, the capital invested and the goodwill of the business constitute the net worth of the business. Goodwill generally means the positive standing of the business in the market. In accounting terms, it means the extra profit the business earns in comparison to the businesses operating in a similar market with a similar amount of capital.

[HassleFreeAdvances.com]

There are many ways to value your business. Below are a few of the most common:

1) Book Value - this is the "Equity" listed on your balance sheet

2) Net Present Value (NPV) - this takes your "earnings" or "net profit" streams (historically) and discounts them over time. This basically tells you what the cash flows are worth.

3) Earnings Ratios - your industry has an earnings ratio attached to it. This tells you how many times (for your business) to multiply your annual earnings for a value.

4) Don't forget growth - for the NPV value, you should take historic growth and apply it to the NPV formula. This will give you a high-end value and you can use the standard (at current earnings levels) NPV calculation as your low-end value.

[HassleFreeAdvances.com]

First, I'd calculate the value of all your assets. Take that amount and set it aside. This is book value, and the figure I would use if it is higher than the measurements below.

Most businesses are valued by earnings (annual revenue) times a multiple (typically somewhere between 2 and 5). To get the multiple, you should google what multiple to use for both your type of business, as well as the size of your business. Again, this is the most common way.

But my favorite way is to calculate Net Present Value (NPV) of future cash flows. In other words, how much is profit worth in the future (discounted more and more over time... until it reaches its terminal value (which makes it worthless).
- First you need a discount rate. It is more favorable to you to use a market like Fed Funds Rate. But it's more accurate to find a discount rate for a company such as yours (as projections are risky and any business is more risky than the Federal Reserve.
- Next, the easy way is to use a simple spreadsheet and project revenue for each month (or year) out in the future.
- - then you take than number (discount rate if annual, discount rate divided by 12 if monthly) and discount each period (year or month) by that amount.
- - - then you simply total the discounted amount from the next period all the way until the discounted amount equals 0
- Now you have Net Present Value of Cash Flow... which is a pre-tax value.

If I were you, I'd use all three methods... and throw out any of them that are way higher or lower... and use the remaining two as a range of value.