When buying or selling a small business, you want to make sure to assess the value accurately. There are five ways to determine a fair purchase price:
1. Look At Similar Businesses
The least accurate option is to look at similar businesses that are for sale on the Internet. The advantage to this option is you can look at similar listings from the convenience of your home whenever you would like.
This is, however, the least accurate option as there can be a wide variety of factors that might make the fair market value of the business you are buying or selling more or less than other listings online.
In addition, the asking price of an Internet listing is often not the ultimate selling price. If you work with a business broker or appraiser, they will have access to comps of the sale of similar businesses both in California and across the country.
2. Back Of The Napkin Calculation
You can also use a multiplier times the revenue of the business. While this option is also free, it is often not accurate as it does not take into account a variety of factors, such as the projection that the future revenues of the business are moving in or net profits. For example, two businesses in the same industry could have the same sales but one business could net $200,000 a year whereas another business could net $59,000 a year because it has more expenses.
3. Hire A Business Appraiser to Assess the Value
You can have a certified business appraiser do a very extensive valuation. This is often the most accurate valuation of the business because the business appraiser digs deep on your particular industry, market forces, anticipated future returns and other factors. The drawback is it is also the most expensive option and takes several weeks for the business appraiser to complete. However, at the end of the process you have a detailed report of the fair market value of the business.
4. Hire A CPA
You can also hire a CPA who specializes in valuation work to review the financials of the business and provide a valuation. This is a less expensive and intrusive option than hiring a business appraiser, but the valuation is also not as detailed. You should ask the CPA how much experience they have doing valuation work and whether they have been certified by the AICPA or the CBV as most have no formal business valuation experience and are not certified to provide valuations.
5. Work With A Business Broker to Assess the Value
If you are selling a business, you can have a business broker review your business and provide a suggested listing price.
If you are buying a business, a business broker can advise you on whether the listing price is fair or if there are better opportunities on the market.
The advantage: initially, working with a business broker is often free because they are typically only compensated if the sale of the business is completed.
The drawback: if you do not work with a trustworthy business broker who keeps your best interests in mind, they might suggest a listing price that is less than the full fair market value to encourage a quick sale and therefore a quick commission payment.
It is fair to ask the business broker how many sales they have completed and hire one who has completed at least fifty transactions. They are more likely to have the necessary experience and competency to set the value appropriately.
If the broker provides you with a suggested valuation, you should request that they provide you with comparable sales to make sure it is a logical sales price.
Some business brokers are willing to credit the cost of a business valuation by a certified appraiser from their commission if the seller agrees to list the business at the valuation price. For many business owners, this is the best of both worlds as you get a detailed, accurate valuation by a certified business appraiser, but the cost is paid by your business broker.
If you have any questions about buying, selling, or setting the value of a small business, or would like an introduction to a great CPA or business broker to help you value a business, please contact us at (415) 633-6841 or email@example.com.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.