When it is time to sell a business, many people are confused about how to adequately determine their business’ worth. There are several factors that both the buyer and seller should consider, so read on to learn buy and sell intelligently!
How much money the business is actually earning? This number should be determined before taxes and interest come into play. This is the most important number, and will impact all other figures down the road.
How long has the business been around? The longer the business has been around, the more value the business has. Businesses generally fall into one of three groups. The first group is a well-established business that has been in business for longer than seven years. These businesses have the most value. The second group is an established business that has been in business fewer than seven years, but more than five years. These businesses still have more value than a new business, but less value than a well-established business. The business with the least value is a business that has been in business for less than five years.
The third factor is how good of a market position the business currently enjoys. A business that is number one or two in its niche has more value than the one that is back in the pack. The current business owner needs to be able to prove that their business is making consistent income year after year, and hopefully growing.
The fourth factor is the amount of time that the new buyer will have to put into the business management. Businesses that require very little hands-on management have the most value. It is important to consider your degree and background, to determine whether you have to hire someone else. If so, how much do strong recruits in the field expect to be paid?
The fifth factor is the amount of hard assets being sold with the business. These assets might include equipment, a brick and mortar store or production equipment. The current owner should do an evaluation of what these items would bring if sold separately. That total should then be added to the final asking price.
The sixth factor is the number of employees the business has. The more employees, the higher the value of the business is. These employees can pick up the load while new management is learning to run the business and implement their own ideas.
If a significant amount of debt will be transferred with the sale of a business, this could entirely break any seemingly great deal. Generally, at least half of this amount should be subtracted from the asking price.
As a general rule, businesses who have been in business more than seven years, who are number one or two in their niche and require very little hands on management, should be valued at eight times their current yearly profits. Those businesses that require hands on management or are currently not number one or two in their niche should be valued at seven times their current yearly profit. The smaller the market share, the less value the business has. The more hands-on management the business requires, the less the business is worth. Those businesses that are newer than five years old, require hands on management and do not have a large market share should be valued at their current yearly profit.
Byline: Taylor Freeman is a freelancer who writes about businesses. He also writes for the blog at www.boatinsurance.org.
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