Valuing a business for sale can be tricky!
A business valuation involves considering; the financial, market condition, licensing, growth potential, uniqueness of the business and the list goes on. A business is an evolving and changing entity, that usually see's fluctuations and is heavily affected by market share, the economy and management. Determining the value of a business needs to be a well-thought out process, its not as simple as real estate and looking at what the neighbours house sold for and putting on a similar price. Every business is different and unique.
1. Income Approach: Most popular approach. It involves looking at the businesses financials over the last few years (ideally 3+) and predicting what the businesses future cash flow would be. If there is potential growth expected, the business valuation is usually increased to reflect this. Accountants are great at helping with this type of approach, see below. It doesn't encompass all aspects of the business however. For example, if you have a patent or trademark on a product that is expected to be the 'next big thing' or you have sole rights to a particular product (e.g. Proactive Solutions) then these need to be included in the final price.
2. Asset / Cost Approach: Is looking at the market value for the assets (assuming the market is stable). It involves looking at every peice of tangible asset, such as equipment and machinery and placing a value on it. Problem - this method does not place much value on intangible assets, such as market share, uniqueness, employees, experience. Its often used when businesses go into liquidation.
3. Market Approach: Comparing your business to others in terms of the amount of market share you hold. It involves looking at the revenue of your business and how much of the market it holds. This is often used for new businesses selling (e.g. < 2 years). If a business has a large market share (e.g. 50% accommodation market, as its one of 2 hotels in town) then the value of the business would be higher than the common Income approach, as it hasn't got the financials to back up the price point, but holds a large market share.
1. Business Brokers-Its the obvious choice. They are the experts in businesses for sale. Its their job. To look at current market conditions, determine what other businesses are selling for, look over your financials and give you an educated guess on what your business is worth. If they are a local broker, they will usually know how business sales are going in your area and can estimate how long it will take to sell. Some brokers will provide you a business valuation free of charge, others will expect a small fee for this service and others may ask you sign on with them to process the entire sale of the business. My advice - look over your financial and THINK about how much you feel the business is worth, do some research, then go and speak with a business broker. Dont be fooled by charm, some brokers just want you to pay the upfront costs then the commissions and will do little work for the sale. Others are great at what they do and handle the entire sale process with professionalism and get results.
2. Accountants - Every small business should have their own accountant. They are a great place to start. Accountants tend to take a financial approach to valuing the business. They will review the last 3 - 5 years financials, average it out, maybe add a bit more, and there you have it.... a price for your business. Accountants are great when it comes to the tax's involved in selling the business, perhaps selling the business in one lump payment is not a good idea, maybe you need to sell the business in stages (e.g. a gradual takeover, with monthly installments or payments based on business profits). My Advice - use an accountant to come up with a financial profits based 'price' for the business, but understand that the value can be different. Think about what you have invested into the business, its potential, its uniqueness, its market share, insight knowledge, etc.
3. Online Research - This method is popular in real estate. Look at the recent sale and auction results of similar houses. Compare the age of the house, the size, number of bedrooms, location, fittings etc and you can come up with a fairly good educated guess on the price of your home. You can even buy a valuation or market report off the internet for around $30. Business sales are never as simple as it involves a lot of intangible assets... I would recommend researching and looking on advertising portals such as www.bsale.com.au and seeing what similar businesses are for sale. If you own a Fish and Chip shop and see another one advertised 45min away for sale at $70,000 it gives you an idea of a pricing point, not solid one, but an idea.
There a number of options that can be used to increase the interest in your business for sale, have a look at our "Business For Sale.. STILL?!?" article.
Was this article useful? Have you done a business valuation before? How did you find the process?