The biggest question when selling a business is trying to determine its value. Whereas a selling a home will be about the property, amenities and other things that can be compared to other listings, valuating a business can be more complex, and there is more than one approach to doing it.
Three common valuation methods
There is no one right way to valuate a business. Instead, there are different methodologies that can be used. In brief, these three most common are:
- Market-based approach: Like selling a house, the seller looks comparable businesses to base the sale price. This could be risky if the other sellers sold low to move the deal along more quickly.
- Asset-based approach: This method measures the fair market value of assets like real property or equipment. However, it does not measure intangibles like reputation in the community or forecasts for revenue.
- Income-based approach: This most commonly used approach uses the amount of money the business generates for its owners. It also uses the multiple of discretionary earnings method which looks at current earnings to forecast future earnings or look at recent years and try to find an average. Experts can review tangible and intangible business assets and come up with a value.
The idea of using one of these approaches is to accurately determine the value. Ask too much and the seller likely will not see many offers and even fewer that match those erroneous expectations. Ask too little, and the seller leaves money on the table that would otherwise be in their bank account.
Getting the necessary help
No one should know a business better than the owner; however, valuing a business is complicated, so an attorney and business analysts can provide an impartial eye as well as useful experience from handling the sales of other businesses. It is advised to bring these people in early so that the process can go as smooth as possible.