Posted on Tuesday, 13th October 2009 by admin
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I want to sell my small business, and need to determine what the value of it is.
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I want to sell my small business, and need to determine what the value of it is.
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Tags: Business Worth, Sell Business, Small Business
Posted in Personal Finance | Comments (5)
October 15th, 2009 at 1:32 pm
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If it were me I would hire an accountant that specializes in business valuations. There are too many ways to calculate worth and they are all right. Having an accountant do it for you gives it some legitimacy.
October 17th, 2009 at 12:27 pm
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Well whatever you do, don’t ask an accountant. Ask a financial advisor.
But in general, the selling price of a business is usually based on the amount of income or cashflow it generates. A buyer will typically pay a multiple of that amount. Whether that multiple is 5, 10 or 20 times depends a bit on what kind of business it is.
If it’s a great business with high profit margins and is growing at a fast pace and you’re selling a product or service that’s in high demand, a buyer may pay 20 times your earnings or cashflow. (Ex., if it generates $100,000 per year in net income, the buyer may pay $2 million for it)
If it’s a much slower growing business or is in any financial distress or is not as attractive, than the multiple will obviously be a lot less.
These multiples may be somewhat arbitrary, but keep this in mind: Buying a business is like any other investment. The buyer needs to earn an adequate return on that investment (with adequate being a different measure for different people). If I require at least a 10% return per year on my investments, than I may not pay more than $1 million for your business that generates $100,000 in income. And if there’s risk that your business may not last more than a few years, than I certainly will not want to pay you more than the total cummulative amount of income it will generate over its remaining life. So if your $100,000 annual income business will only be around for another 5 years, than I certainly won’t pay more than $500,000 for it (although it will probably be much less than $500,000 after I adjust for the time value of money).
All of these factors combined are what go into this decision. Again, it’s all a bit arbitrary and there’s no exact science for it, but hopefully this will at least serve as a guide.
October 18th, 2009 at 2:58 pm
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