If you are considering selling your small business, one of the first questions you will ask yourself is how much is my company worth? The ultimate answer to your question is your business is worth however much someone is willing to pay for it. It is important to set your selling price at a level that will generate a decent profit for you without overpricing it to the point that you scare off interested buyers. There are several different methods you can employ to come up with a realistic selling price.
Asset Valuation Method
This approach is mainly used for companies that do not have recent cash flow or profits. The method may also be used in other circumstances where a quick sale is needed. The selling price of the business is determined by adding up the replacement value of the company's assets and then subtracting the liabilities. Since this method does not take into account the company's future earning potential, the selling price tends to be on the low end of the spectrum.
Cash Flow Method
With this approach, a company's value is determined by taking the discounted cash flows from sales or other revenue streams and subtracting the expenses. The discount rate used will depend on your industry's growth rate and the projected interest rate, among other factors. This approach is more thorough than the asset valuation method because it takes into account the ability of a business to generate positive sales, profits and/or cash flow. A multiplier is then used to determine the selling price of the business. For example, a business with discounted cash flow of $200,000 with a multiplier of 4.5 would have a selling price of $900,000. The multiplier used will depend on both industry and company-specific criteria. Buyers are generally comfortable with this approach because their main interest is in the profits or cash flow that the business generates.
Rule of Thumb Approach
With this method, the selling price of a business is determined based on what other businesses within a particular industry and location have sold for. Appraisers look through databases of recent sales transactions to come up with a selling price for your business. This approach does have the drawback of not taking into account any particular strengths your business might have. However, it is based on actual prices that other businesses have recently sold for.
How to Have Your Business Professionally Appraised
In order to come up with a realistic value for your business, you will need to have it professionally appraised. You can hire an accountant, business appraiser or business broker to do this for you.
Accountants and appraisers will charge a fee to come up with a value for your business. A business broker charges a commission for selling your business for you. Coming up with a selling price is usually included as part of the service that a business broker provides. No matter which professional you employ to come up with an appraisal value for your business, you will need to supply them with several years worth of financial statements and other company information so that an accurate valuation can be made.
Julie Harrison is a blogger at Tampa business broker. She loves to write awesome tips about buying and selling your business.