How to Value a Business to Sell
When you decide the time is right to sell your business, probably the biggest question is how much you should ask for it. Unfortunately, there are a myriad of ways to evaluate it, given its potential earning power, the assets you'd like to sell, and the time it might take to attract a potential buyer. After you do your homework, you must decide whether you will hire a business broker to sell it and handle all the details for you or sell it yourself.
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Instructions
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Place a value on all the assets of the business. This method is appropriate for businesses that are unlikely to continue earning income as it has for you in the past. For example, say you have been a successful life insurance agent for years. There is no guarantee that a potential buyer will continue making money when you are no longer part of the business. Thus, you should evaluate all of the office equipment, your prospect list, and any real estate used in connection with the business, and not include a value for the business itself.
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Capitalize earnings to arrive at a fair price for your business. If you anticipate that your business will continue under new ownership, this is a good way to approach a price. For instance, you want to sell a liquor store that has been highly profitable for a number of years. Rather than placing a value on inventory, property and goodwill, it might be wise to base the asking price on a multiple of historical annual income. If you adopt this method, you should know that most businesses in the United States sell for one to three times the average annual income. Given the ubiquitous nature of liquor stores, and if you ask for help from a business broker, he should have access to the multiple used by others in your area.
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See what other businesses like yours have sold for, then adjust the selling price for your sales volume, profitability, and cash flow. This may be the most accurate valuation, particularly if there have been multiple sales of "like" businesses in your area. It is easy for a potential buyer to understand and it gives him an accurate frame of reference.
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Look for help because placing a value on your business is difficult. You can find business appraisers at either the American Society of Appraisers or the Institute of Business Appraisers. The websites of both organizations appear below.
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References
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