Forums: Discussions for entrepreneurs and small business.

Ever wondered about how small businesses are valued? One of my clients, Steven Schlagel, CPA, CVA, CFP, JD has just completed a guide that is helpful to entrepreneurs in learning how small businesses are valued. We are interested in gathering some useful feedback on the guide and would like to make it available - via email or download (http://bit.ly/pwGQaQ) - to anyone who might be interested. In exchange for your free copy, we ask that you complete a brief four question survey at the end of the guide. If you have any further questions, please feel free to PM me.

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simple - take the annual earnings and decide how many years worth you should accept or pay depending on whether buying or selling.  the nature of business matters as well - i.e. does it require lots of hard work or is it automated?

alternative is to offer book value for underlying assets if you don't think goodwill plays a part.

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This is the perfect tread for anyone who wants to know about this topic.

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Would that it was as easy as the guide lays out, or anywhere near as easy as some think.  Wouldn't:

• A $100,000 company with $100,000 in assets pose a FAR smaller risk than a $100,000 valuation with $0 assets?
• A one-person operation (like barber) who's clients are closely tied to prior owner are more likely to leave upon ownership change be worth different than one owner is less emotionally attached?
• A company that is growing be worth more than one not growing - even when their "average" is the same?
• A company that once served 5 times the business be worth more than one that has just enough assets to get by for now?

There are MANY MANY things that affect valuations.  Unofortunately too many people think it is a simple multiple.  

As in the stock market, the person that understands does well - the person that follows the trends/advice of the day are not much more than the final victims of a pyramid scheme.  They are the ones that take the big loss. 

 

 

 

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Ed
Business Optimization - www.businessoptimization.biz

Ed, you make some excellent points here, and I couldn't agree with you more that there are many, many things that can positively or negatively affect the valuation of any particular business. Yet, even with the four examples that you mention above, there are more variables to be taken into consideration. Perhaps the most important one is the buyer's threshold for risk?

In support of your post, I did want to reiterate a few points mentioned in the guide:

1. The guide is not an "end-all, be-all" for the layperson - whether buyer or seller - to determine an exact value for the business. As the guide points out, it is meant to be a general guide that can help the buyer prepare the Letter of Intent WITH his advisory team. Once the process moves forward from there, a more thorough Due Diligence is performed that can better take into account many of the variables that you do (and don't) mention.

2. The guide points out the potential for error if the process of valuation is undertaken by someone who is not trained - it does recommend engaging a professional.

3. With the understanding that such valuations are best saved for professionals, the guide does seek to share some general wisdom that can assist a potential buyer with determining whether or not to pursue any given business opportunity.

Again, Ed - thanks for sharing your thoughts here. Your feedback will assist us with further improvements!

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lovely, thank you for the information!

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Thanks for the link.  It is still hard to understand how some places have such a high value with no revenue but high traffic. Tumblr was valued at $800 MILLION.   No way. --------------------------------------------------------  

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Valuation of a business is not a simple exercise.

Yes, you can normalize costs and apply a multiple to Operating Profit, but then...what multiple?  In these times is the business sale-able at all?

There are too many variables for a standard answer.

Yes, I agree with your comment - a professional adviser is best in these circumstances.

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www.successfully-start-business.com

starting from small business is a good choice.Small business make up big business.

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