Prospective buyers make the decision to purchase a business based on future upside potential, but they establish the price they’re willing to pay for the business based on its past and current performance.
When you are ready to begin the valuation process, a business broker or a business valuation service can help you determine its value. A professional business broker is in the marketplace working with buyers. He has his finger on the pulse of market conditions that affect value. He will confer with the seller’s CPA and use financial information, cash flow, and market conditions to determine market value and recommend a selling price.
There are many factors that go into determining the value of a business. These include the industry and the sector the business is in, the economy and the local economic climate, cash flow, the value of a company’s assets, inventory, accounts receivable and accounts payable, how long the business has been operating, and its customer base.
It’s often difficult for a business owner to view these things objectively, so to set a realistic selling price, it’s a good idea to get advice from an objective outsider who has a feel for the current market.
It’s not unusual for a seller to believe that his small business is worth more than a realistic valuation will conclude.
The sale prices for most small businesses can often be estimated by using a multiple of cash flow. If you’re thinking about selling and have no idea what the business might be worth, a simple guideline can help give you a rough idea.
An established business with a strong market position, clear competitive advantages, a growing and reliable customer base, and steady earnings could be worth a multiple of five to seven times current profits, while a similar business with no significant competitive advantage and a dependency on strong management skills will more likely be looking at a multiple of two to three times current profits.
There are many formulas to develop market value, but in the end a business is worth what a buyer is willing to pay.