Business Valuation Methods
If you are considering selling your business, you are probably wondering how to determine a fair price. There are several ways to value a business and some other factors to consider in a business sale:
What is Being Sold and How Soon Do You Need to Sell?
The first thing to consider is what you are selling and how soon you need to sell.
- Are you selling the business as a whole, are you selling the shares in the company (if it is a corporation), or are you selling the various assets of the business (equipment, inventory, furniture, other assets) separately?
- Are you selling intellectual property, like patents, trademarks, or copyrights?
- Are you selling a building or are you leaving leased space?
- Do you want to sell quickly or can you take time to wait for the best offer?
What Valuation Methods Can You Use?
There are several ways to value a business, depending upon what is being sold and how soon it needs to be sold:
- Appraised Value
This amount is determined by a certified appraiser, who looks at property and equipment and provides an estimate of value depending upon age, condition, location, and other factors.
- Liquidation Value
This value is the price that can be obtained for a business that is, or will soon be, ceasing operations. Because there is no longer a customer base, there is no value in "goodwill," and the value of assets is lower because the business must be sold quickly.
- Investment Value
If you are selling the business as a whole to an investor, this is the value of the business based on return on investment. Sometimes this is called "going concern."
What is "Fair Market Value?"
This term is used to determine the value of a business which is a "going concern." It includes the concept of "willing buyer and willing seller." Both parties must be interested in arriving at a fair price, and neither party should feel that he or she is being coerced.
The Three Most Important Things to Remember When Valuing Your Business
- There is No Magic Formula
There is no set formula to determine the price of a business. Two busineses of the same type in the same location for sale at the same time may not sell for the same price, based on other intangible factorss. The process of selling a business involves a great deal of negotiation and compromise.
- It is Difficult to Set a Price on Goodwill
One of the big reasons that it is difficult to find a magic formula for a business price is due to "goodwill." Goodwill is said to be the difference between the appraised value of the assets of the business and the selling price. In other words, it is the value of customer loyalty. The new owner may or may not be able to count on customer loyalty, so how does he or she know what to pay for it?
- There is No Way to Predict the Future
It has been said that the business you are selling is not the business the new owner is buying, because the business changes in character from the day the new owner steps in. The intangible factor of the owner's personality, his or her relationship with customers, employees, and vendors, can and will change the business to something new and different.
Valuing a business is a difficult task. Getting help from a business broker or appraiser may help you make this task easier.
