Businesses on the Net

Pricing A Business – How much is my business worth?

Pricing A Business – How much is my business worth?

1. Value of tangible business assets

Tangible assets are physical, such as furniture, equipment, and inventory. If the tangible assets are in reasonable shape, there may be a ready market for them. An appraiser can help you put a value on these tangible assets.

2. Value of intangible business assets

There may be value in your business name, or in patents, copyrights, or customer lists you own. And favorable long-term contracts with customers or suppliers or a transferable long-term lease in a good location can also be valuable intangible assets. Employees can also be important intangible assets.

3. Sale prices of comparable businesses

The closest to an ideal way to set a value on your business is to see what other small enterprises like yours have sold for. In the real estate business, this is called looking at comparables.

4. Industry formulas

In some businesses, it is often said that you can arrive at a sales value by multiplying either gross sales or net earnings by an accepted number. If you’re considering buying a business in a field where formulas like this are part of the culture, look at what the price would be using that formula, but don’t ignore other factors.

5. Market demand

If a number of similar businesses have just been put on the market or there’s been a recent spate of factory closures in your area, there may be no interested buyers at your price or within what you believe is a reasonable range.

6. Your personal needs

If financial pressures are forcing you to sell your business quickly, you’ll probably have to take less than the optimal sale price. Or, if you’re unable or unwilling to work for the buyer — even for a short time after the closing — that fact may diminish the value of the business in the eyes of a buyer.

7. Type of buyer

For a buyer who will be relying on the business for a livelihood, the sale price and the terms of payment need to result in cash flow that is sufficient to cover paying the buyer a decent salary — in addition to covering operating expenses and installment payments to you. But for a buyer who is considering your business as a strategic addition to a similar business he or she already owns, the

benefits of scale may allow a lower price; bookkeeping expenses, for example, may increase only slightly when the buyer adds a second location.

8. Terms of payment

The terms you require, such as the amount of the down payment, the repayment period, and the interest rate, can all affect how much a buyer will agree to pay. And you may want to charge more if you’ll be paid over five rather than three years, for instance, since during the repayment period, you’ll be exposed to more risk of buyer default.

9. Appraisals

Appraisers excel in assigning values to tangible property such as land, buildings, and equipment. However, in most cases, a business is worth more than the sum of its assets, so if you choose to use an appraiser, pick one who understands and has had experience in including the nontangible factors, such as a favorable lease or excellent goodwill.

10. Put it all together

All or some of the above factors can be used in pricing your business. But keep in mind that the overall deal — price and payment terms — has to be realistic, even though you’d like the sale price to be as high as possible. You need to feel reasonably certain that the buyer is unlikely to falter and that the odds are that in three or five years, the buyer will make the final payment. This means that, during the years the buyer is making payments and also probably working in the business, the business must produce enough income to pay the buyer a decent salary in addition to covering the monthly payments to you.

Talk with an experienced Business Broker

When trying to value your business, it is best to talk with an experienced business broker. In most cases they can give you a free confidential consultation and appraisal.

So how much is the Average Business Worth?

On average most small businesses are worth 2.7 x cash flow. This price includes all Inventory, Furniture Fixture and Equipment (FFE), Customer List, Business name, etc. Here are some standard pricing guidelines however this is somewhat vague as the real price will depend on market, customers, location, business reputation, cash flow, and gross sales.

Restaurants – 2.7x cash flow

Retail – 2.7 x cash flow

Service – 2.x7 x cash flow

Manufacturing – 2.5 – 3.5 x cash flow

Coin Laundries – 1 x gross sales

The business Broker Journal – Learn how to Price a Business. How much is a business worth.

Steps in Selling Your Business

1. Determine a Realistic Price Range

If you price your business too high, you’ll scare away buyers. If you price it too low, you’ll lose out. To figure out a range that’s realistic, you can use one of several methods – and then maybe blend the results. For example, you can base the price on the value of the business’s assets, and add in a sum for the goodwill the business has developed. Or you can see how much comparable businesses in your industry and locale have recently sold for. Or you can use an industry formula (for example, a value based on the number of units sold annually or a multiple of average earnings).
2. Understand the Tax Consequences

Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be — and to try to lower it, most likely with help from a CPA or other tax expert.

Your tax bill will be influenced by two key factors: How your business is legally set up and — in the case of a corporation or LLC — whether you’re selling the assets or the entity. Sales of all sole proprietorships and almost all partnerships are asset sales. So are the sales of many corporations and LLCs.

3. Look Good for a Sale

The getting-ready process includes not only sprucing up your premises, but getting your numbers in good shape. Consider recasting your tax-return numbers for prospective buyers. This can involve, for example, adding back to your profits discretionary expenses such as medical insurance for you and your family, travel and entertainment, business vehicles, memberships and subscriptions, and salaries and bonuses paid to family members.

In recasting your tax numbers, you’re not deceiving either the IRS or prospective buyers. You’re simply pointing out that the buyer may prefer not to spend money on some of these items in the future.

4. Seek Potential Buyers

If your business is well known, word that it’s for sale may be enough. Or, possibly someone close to you — an employee, a friend, or a customer — could be a prospect. But more likely, you’ll need to reach out to a bigger pool. This often includes putting ads in newspapers and trade publications, and on business-sale websites like The business Broker Journal.

5. Confidentiality

Confidentiality is one of the most important tools when it comes to selling your business and should not be taken lightly. It is extremely important when selling your business to keep as much information as possible confidential. This means, it is not a good idea to advertise the business name or address for sale because it can negatively affect your business operations. If existing employees find out your selling they may feel their job is in jeopardy and may begin looking for another job. The same goes for customers or vendors, if they learn your business is for sale, they may feel like your business is closing or that they are loosing the business relationship they have built with you over the years.

6. Hire A Business Broker

A Business Broker is a professional business advisor experienced in buying and selling existing businesses. Business Brokers generally work for commission only and are paid by the seller. Fees are usually around 10 % of the purchase price with a minimum fee between $8,000 & $20,000. Find a local business broker.

There are many benefits to hiring an experienced Business Broker.

1) Brokers already have established relationships with people interested in buying existing businesses.

2) Brokers will handle the transaction from start to finish.

3) Brokers know how to keep your business sale confidential as well as pre-screen buyers.

4) Brokers will advertise your business for sale confidentially using their own money to do so.

5) Brokers work for the seller and are paid a commission only after selling the business.

6) Brokers will help you determine the best price to list your business for sale.

7) Brokers will help you negotiate the best price for a business. Often much higher than you would get if selling your business by yourself.

Brokers will help the buyer with financing solutions.

9) Brokers will help the buyer and seller through the due diligence process.

10) Using a broker in general will save you money, time, and stress.

7. Negotiate Your Deal

In working out the terms of the sale, some key issues include whether you’ll sell the business entity or just its assets, what assets (like a truck) you want to keep, and how the buyer will pay you (usually, a down payment plus installments).

8. Sign a Sales Agreement

You’ll need to put the deal in writing. Among other things, your agreement should list and value the assets the buyer is purchasing, list any contracts the buyer is assuming, and include protections that assure you’ll get paid the full sale price. If you attempt the first draft of the sales agreement yourself, have it reviewed by a business lawyer to make sure you’ve covered all the bases.

9. Plan for the Closing

The closing is the meeting at which you transfer the business to the buyer. To reduce last-minute hassles, make a checklist of all the papers you and the buyer will need to bring — everything from the documents and money associated with the transfer to your alarm codes, keys, and customer lists.

10. File Paperwork With the IRS

After the sale, you and the buyer need to jointly complete IRS Form 8594, Asset Acquisition Statement and file it with your tax returns for the year of sale.

For more information on selling your business visit the Business Broker Journal website www.businessbrokerjournal.com

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