What’s Your Business Worth
Although many formulas and tools can help you determine the selling price for your small business, there is no magical solution that will come up with the correct price for every instance. The final price ultimately depends on how badly the buyer wants to buy and how strongly the seller wants to sell. There are a number of ways to value your company and determine your asking price. For example, find out the selling prices of similar businesses in your area and use them as a starting point. Or contact the national trade association for your industry, when applicable. These organizations usually keep detailed statistics and are more than willing to provide information to members or potential members.You can also hire a professional business appraiser. This may lend more credibility to your initial asking price and allow you to keep the reins on sale-price negotiations.Common valuation methods include:
- Market-based valuation. This method is frequently used by business brokers and is based on their past experiences selling similar businesses. The broker may recommend an asking price based on the sale prices of similar businesses in your area and industry. Although this is not a comprehensive valuation tool, it is common practice for the sale of small businesses because it is quick, inexpensive and makes sense to buyers.
- Asset-based valuation. This takes into account figures such as the book value and liquidation value of the business. These are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.
- Earnings-based valuation. This method uses historical financial figures, including debt payments, cash flows (past, present and projected) and revenue. Earnings-based valuations are often combined with asset-based valuations for a more-inclusive appraisal.
When preparing your business for sale, present the most accurate, up-to-date information for prospective buyers. A selling memorandum is a marketing piece designed to highlight all aspects of your business, including: The products or services you provide, How you have fared in the industry, Your competition, Operational procedures, Management, Employees, Marketing materials and History of the business. Once you’ve sold your business, notify your insurers. They will want to know about any liabilities that could arise once you’re no longer in business. You may need to return the original policy or sign a “policy release” or “lost policy release.” But consult with your attorney before signing anything. You also will be responsible for paying any unearned premium.
