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SStrauss, Ans#7
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A: When it comes to selling a business, there are basically three questions to consider:

 

1. What does the business own? A business that has invested a lot of money over the years in assets is obviously more valuable than a business that has not. Assets can take many forms. Of course they cover things like trucks and equipment, but also must take into account valuable contracts, intellectual property rights, and "goodwill" (i.e., the reputation that the business has in the community.)

 

Sellers tend to overvalue goodwill and buyers tend to undervalue it. The important thing then is to realistically calculate the value of the name of the business in the community.

 

2. How much does the business earn? Again, the same principle applies – a business like yours that makes a profit of $100,000 a year is much more valuable than one that nets $35,000.

 

3. Are there any intangibles to consider? What makes the business unique, profitable? Do you have a great location, a favorable lease, great employees? These are the last things to consider.

 

These three items are then taken into account and used to determine the value of your business. There are three ways to go about doing so. The first is called price building. The second method is called return on investment. The third is the multiplier.

 

Price building is a valuation method that simply looks at the hard facts - assets, goodwill, leases, real estate, etc. Essentially what you do here is list every asset and give it a reasonable dollar value. For example, yours might look like this:

 

·         Real estate: $150,000

·         Equipment: $15,000

·         Inventory: $25,000

·         Goodwill: $10,000

·         Total: $200,000

 

$200,000 may or may not be the right price for your business. While it is hard to say, the price builder method indicates that that is the right price (assuming the numbers listed above, of course.)

 

Return on investment (ROI) looks at the business profit, per year, to help the buyer see what the return on his investment will likely be. For example, let’s say that you decide that $200,000 is the asking price. Is that fair? Using the ROI method we would see that:

 

·         Net profit: $100,000

·         Business sale price: $200,000

·         Return on investment ($100,000/$200,000): 50%

 

Using this method, and these numbers, the buyer would be making out like a bandit, getting a 50% return on his investment. There are few investments out there that allow a 50% ROI. Thus, a higher amount for the business is probably in order.

 

The last method is the multiplier. Here you would again look at the earnings, but you would then multiply it by some factor – it varies depending upon the industry – to get a final price. A factor of 3 would result in a $300,000 asking price. Of course, the battle is what that factor should be.

 

If all of this is too complicated, then consider simply getting an appraisal and/or hiring a business broker (look in the Yellow Pages under "business brokers".) Though you will pay one a decent commission, it may be worth it to ensure that you get a fair price.

 

Finally, pick up How to Sell Your Business by C.D. Peterson, and good luck!

 

Today’s tip: Have you ever considered using coupons to build your business? Historically, fewer than 3 percent of all coupons are ever redeemed. That does not mean, however, that they are worthless. There are several benefits to using coupons:

 

  • Having someone new simply see your coupon helps build the brand
  • Creating and distributing coupons is an inexpensive way to tell a new group of customers about your business
  • Honoring an expired coupon is a great way to build goodwill
  • Coupons can also be a loss-leader that brings people into the store for the coupon price but allows you to possibly sell them other items that they may need at your regular price.
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