David Deicke explains how he values his own small businesses
If find the problem with selling any small business ($500,000 and below) is how to put a realistic value on the business in order to sell it. If a business is valued too high no one will be interested or worse value it too low prospective buyers may think there is something wrong with it, so you are having a fire sale. They may try to talk down your sale price thinking you are desperate.
I don’t believe there is any fixed system when it comes to valuing any private business. There are also many wonderful mathematical formulas that can be used but no fixed system. To be honest the system is more about what price is a person is happy to sell a business for and what the buyer is happy to pay for it.
If you are either buying or selling a small business do not be afraid of negotiation, it is a natural process within business. There are many good negotiation techniques you can use.
The following list is a simple aid to assist people who are interested in finding a value of a business, either for the sale or purchase.
1. Does the business have employees either full time or part time? More workers means more financial responsibilities post handover.
2. Is the business purely an internet business? Be warned it is very easy for an online business to appear to be doing very well, when the truth is completely the opposite. This practice unfortunately is leading to the devaluation of genuinely profitable online businesses.
3. Does the business have fixed assets or stock? It is much easier to value a garage where real estate and equipment can easily be valued, where as it is less easy to value a business with no fixed assets.
4. Does the business have a full audit books trail; it is surprising how many small businesses listed for sale do not.
5. What area is the business in? It goes without saying that businesses located closer to major cities are valued higher than businesses in a rural district.
6. What are the future growth prospects for the business?
7. Will the business require insurance/liability policies?
These are just a few factors that have to be considered, as you can see there is much more to take into account than how much revenue is generated by the business.