As a business broker, I deal with many different business owners, agents and consultants on a regular basis, all of whom could benefit from a better understanding of business valuation. It always amazes me when I learn about the non-traditional methods they use for pricing a business for sale. This may explain why just over 30 percent of all businesses for sale actually sell. Considerations such as the available cash flow and the debt ration of the business must be taken into account when placing a value on a company. Ultimately the structure of the deal and available financing sources may determine the price.
Using a market approach of pricing a business for sale, the fundamentals of supply and demand ultimately determine the value of the business. Using a market approach, pricing a business for sale involves assessing how much money it makes and determining its value from there. For example, there would be greater demand for a profitable distribution business with few assets and than a large machine shop with plenty of assets that cannot make a living for its owner.
First you will need to determine the adjusted net income of the business. This equation involves the profits, the salary taken by the owner, and other cash-related benefits that are enjoyed by the principals in the business, such as company cars, company paid healthcare and other “expense” categories. It will also deduct for depreciation and interest amortization that benefit the owner of the business.
Keep in mind that when selling, prospective buyers want any statements you make about your business to be supported by evidence in the form of accounting records and other reliable sources, so steer clear of any admissions to doing business “off the books.” Be prepared to demonstrate an earnings history and be prepared to back it up with documentation.
Another approach is to apply the multiplier method, which is a figure that is applied to the cash flow of the business to calculate an approximate value. Each industry and region has a different multiplier for businesses, so there is no point theorizing about which multiplier to use. A business broker with experience in pricing a business for sale will know which one is most suitable to your business or industry.
Before you move forward with selling your business, make sure you are accurately pricing your business for sale. This important factor can make the difference between a business that sells and one that sits on the market indefinitely.