Many owners of small businesses dream of selling their companies and taking some time to relax before possibly moving on to the next venture. In order to sell a business, you must first evaluate its worth in order to come up with an asking price that makes sense for you and potential buyers. Business valuation can be highly subjective, but there are definite strategies and criteria that you can use as starting points. Be realistic and flexible, and work closely with interested buyers to develop a mutually advantageous sale package.
A multiplier equation provides a starting place for evaluating the worth of a business. Multiplier equations involve taking the profit or cash flow that the company typically generates in a year, and multiplying it by a widely accepted standard used for evaluating comparable businesses. Multipliers for most industries run between 1.5 and 2.5 times the net income, adjusted for factors such as expenses that are specific to the current owners, such as interest payments on start-up debt.
Once you have determined a base price for valuing your company using an appropriate multiplier, you can justifiably adjust the price based on what your business owns. If you own the building in which your company operates, add the worth of the property to the business sale price. In some business sale negotiations, interested buyers may insist on adjusting the value assigned to equipment based on the number of years you have used it and depreciated it on your tax returns. For example, if your business owns a machine that you have owned for four years and depreciated on a five-year basis, you may only be able to value it at 20 percent of the price you initially paid.
A variety of intangible factors may also influence the value you can assign to your business. If your company has been operating for many years and has built a strong reputation based on outstanding customer service, you may be able to adjust the sale price to reflect this intangible asset. In addition, if your industry is currently growing quickly or receiving plenty of media attention, this may affect the sale price. Alternately, if you work in a declining industry, you may have to adjust your sale price downwards.
The Negotiation Process
Regardless of how thoroughly you may be able to justify the worth that you have determined for your business, you will only be able to sell your company if you find someone who is willing and able to buy it. Big-picture economic considerations such as a recession or current interest rates may make it difficult for interested buyers to find sufficient capital, even if the business is fairly priced. Virtually every business sale process involves at least one round of negotiations based on the feasibility of the sale and the appropriateness of the asking price.
Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years.