Deciding the market value of a business is the most difficult part of the selling process.
Business owners often have misconceptions, believing the business is worth more than the market value. A broker or a business valuation service is the best bet in determining a value that is in line with what the market is willing to pay for the business.
The largest component in determining business value is deciphering how much money the business makes. The financial statements are analyzed to create a base value and then subjective factors adjust the sale price either up or down.
Many buyers want to know how much of the business price is allocated to what they can feel and touch, or hard assets. Normally, the higher the value of the asset, the higher the sale price.
Often, a small business is valued by cash flow, hard assets and inventory. When A/R and/or AP are included in a business sale, the price is adjusted either up or down based on the A/R; A/P net values.
The terms of payment affect the business value. A business purchased using a high leverage factor is generally worth more, and sells quicker than one that requires all cash. Business transfers are either the purchase of a company’s assets or the sale of its stock. In the small business arena, a stock sale is usually most beneficial for a seller, while an asset sale is most beneficial for a buyer.
The subjective valuation factors of a business are years in business, employees, the reason for the sale, customer and supplier base and business desirability. Other factors that increase or decrease a company’s market value; market strength, industry growth, appearance, location and owner involvement.