When looking at the task of selling a small business you may be wondering where to start. So much is in place with an existing business; there must be a good deal of intrinsic value right?
Selling a business is much like selling any other product. The value of the product is what someone is willing to pay for it, and what they are willing to pay for it is a function of what the product will do for them, and how available alternative solutions are.
Start With Hard Assets
A good place to start is with your hard assists. What is the total cost of all of the physical resources that make up your operation? This could include; tools, vehicles, buildings, materials, inventory etc, anything that is required to make the business run day to day. A good way to account for everything is to approach the valuation as if you are relocating, or starting from scratch.
This should give you a bottom of the barrel price. Selling for anything less is to sell at a guaranteed loss. This approach is often taken when a business is shut down and liquidated. The assumption is that the intrinsic value of the company is 0 and the only worth is in the physical goods.
Remember to that most hard goods depreciate with use. The spiffy copier you purchased 3 years ago to print out all of your flyers is no longer the 1000.00 work center it once was. Obviously the rate of depreciation will differ from asset to asset.
Historical Performance and Income Multipliers
We know that the value of a company can also be associated with its ability to perform, so how do we factor that in? Many industries have generally accepted gross income multipliers that when multiplied by gross earnings provide a good estimate for a sales price. This is by no means a definitive number but it is a quick way to determine if a price would be in the ball park or not. Any fluctuation in historical performance must be accounted for. Valuating a company based on the latest numbers may not be a true representation on its true worth.
Compare Compare Compare
It would also be advisable to incorporate multiple comparables into your assessment. Companies are bought and sold all the time, find some in your industry that fit your demographic and see what they sold for.
If you are serious selling your small business be sure not to rely exclusively on any one valuation method and find an appraiser who deals in your industry. Hiring a professional is vital if you want to move forward.