Some will say the value of a business is:. From my experience a valuation does not have a silver bullet because, by definition, each business is different. Our view, as professional business valuers, is that while there are guidelines around what a small business might be worth compared to a large business, or what a large business in, for example, the pharmacy sector might be worth compared to a large business in the manufacturing sector etc, every business is different.
There are numerous ways to value a business, but which one can help me arrive at a useful approximation — specifically if I want to sell my business? Methods include:. I have been selling private businesses for over 25 years in the UK, Australia and South Africa, and have found that nine times out of ten it is the last one, the Multiple of Earnings method, that can be used to give the quickest and most useful approximation for the vast majority of businesses.
Sometimes business owners will ask, can I use a rule of thumb to value my business? You certainly can, but you should understand the pros and cons of rules of thumb before you make your decision. A rule of thumb is a broadly accurate guide or principle.
Rules of thumb can be useful to determine if a proposed business transaction seems reasonable prior to accepting an SBA loan application. However, most businesses are unique, and applying a rule of thumb without additional analysis can be dangerous. Sometimes the rules rely on multiples of operational data such as number of hospital beds or customers, or a combination: X times revenues plus value of vehicles.
Next, you need to decide which year of earnings to base the valuation on. Often, sellers will base their asking price on a multiple of the current year earnings, even though the second half of the year has yet to happen. Then you want to think about earnings history.
In order to ensure that you get the best price for your business, it is wise to hire an expert business appraiser. The appraisal process can be very complex and time-consuming. It takes quite a lot of experience to do well.
October Business owners looking to sell their company are undertaking a transaction that is usually crucial to their net worth. If the business is overpriced, the owner could lose qualified buyers; if the business is underpriced, the owner will not receive full value.
Rules of Thumb in business valuations almost always benefit the seller of a business. Rules of thumb are often used to justify or validate the value of a business that is either unprofitable or uneconomic. In preparing hundreds of business valuations for family law and commercial litigation and advising people on business valuations, we constantly come across rules of thumb as justifications for a business value.
Q: I am looking into trying to buy an existing teashop. The owner said to make him an offer, but I'm not sure of the best way to determine the worth of the business. Do I ask to see his books or do I value it based on the existing clientele?
This is an ongoing mantra of mine and one that I bore myself with on a regular basis because so much of the value of a business is shaped and enhanced by good preparation that it has to be included in any assessment on valuations. Well, it certainly does when considering the methodology and validity of valuing different sizes of business. The differing factors involved when valuing public vs.