How to Value Your Small Business

What is your small business currently worth? It is difficult to put a price tag on a business that is not publicly traded. Typically, the value of a family-owned business will exceed the total value of the hard assets, such as equipment and inventory. In addition, assigning a value to intangible assets such as goodwill is a difficult proposition, at best.

Frequently, it makes sense to have a business appraised by a qualified professional, especially if you intend to sell it in the near future.

More information: There are several ways a qualified appraiser can assess the key aspects of a business to arrive at a final figure. As part of the process, the appraiser will provide a valuation report, explaining in detail the specific methodology used for the valuation. This will be important when the buyer conducts its own due diligence. The chances of consummating a deal will increase if the buyer knows that he or she is dealing with a professional.

However, this is not the be-all and end-all. The appraisal should be viewed as just the starting point for negotiations. For instance, one buyer may have strong reasons for acquiring your company and could be willing to pay more than the amounts offered by other interested parties. Conversely, another buyer might be looking to merely enhance an existing operation and may not be willing to pay for the company’s going-concern value. It is important to analyze the reasons behind the purchase before you establish a price.

Some of the key aspects that should be considered in this process are:

  • both the primary and secondary factors influencing buyers
  • different ways to add value before the sale occurs
  • necessary adjustments to financial statements (especially those that portray your company in a favorable light)
  • the methods and formulas used to put a price tag on a business

Note: Other adjustments may be required if you are planning to sell only part of the business. Of course, your plans may change.

After the professional appraiser has established an approximate value for the business, you must use your negotiating skills to come to an agreement. Depending on the situation, you may be able to realize the full value of the business, or you might be willing to accept a slightly lower price if you are looking to sell quickly. Obtain guidance from your business broker concerning the going rate for a business such as yours.

One option is not to set a listing price at all. Instead, you might contact potential buyers and provide them with information about your business. Then you solicit bids from this select group and accept the highest bid. This process may help you realize a competitive price for your business in a relatively short period of time.

The best approach is to use the services of a professional adviser every step of the way. This can help ensure that you have established a reasonable and accurate value for your business in today’s marketplace. Alternatively, you may determine that it is not a good time to sell.