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Easy Way To Value a Small Business

The Quick and Easy Way To Value a Small Business

There is a lot of bologna, spin, gimmicks and fast talking out there when it comes to valuing a small business.

In the next couple paragraphs, I’m going throw it all under the bus and share with you the Quick and Easy Way To Value A Small Business in a straight-forward and professional manner.

Let me be clear – You need to keep in mind one simple fact: a business is only worth what someone else is willing to pay for it. Not a penny more and not a penny less.

That being said, there is no science to placing a value on a business.

First of all, the “Asking Price” for a business is usually too high.

Second of all, a buyer almost always thinks the asking price too high as well.

The key to establishing some sort of realistic asking price, the first thing that needs to be done is get the numbers together.

This formula applies a factor to the previous year(s) Owner Benefit figure to arrive at a purchase price. The Owner Benefit figure is a combination of several factors:

Pre Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + Depreciation = total Owner Benefit.

After you have the final number, all you need to do is go on and run comparable sales data. They make it so simple a 3rd grader can do it in about 10 minutes.

There is no real “Rule-of-Thumb” for a multiple of earnings because some will sell for 1-time owner benefit, while others will sell at 6 and 7 times. The key to a higher multiple depends on a number of different numerous things. Here are 4 of the most important ones:

  1. Amount of time owner works in the business.
    The more time, the lower the multiple. The magic number is 20. If the owner works more than 20 hours per week, the price goes down. If they work less, the price goes up.
  2. Amount of monthly cash flow needed to “float” receivables. The longer the receivables, the lower the multiple.
  3. Percentage of business comes from one customer.
    The lower the percentage, the higher the multiple.
  4. Recurring / guaranteed income streams. Annual contracts, monthly subscription, service contracts, or membership fees are worth a small fortune and the multiple increases significantly.

There are a lot more than 4 pieces of the puzzle when it comes to getting higher multiples and prices – way too many to list here.

A buyer looks at the asking price in a way they can reasonably expect to generate cash, how fast they can get their money back, and how much work they are going to do themselves.

If You Want to Sell Your Business For Top Dollar, The Best Way to Do It Is Hire An Expert.

Business Sales is a Specialty and increasing business value is a Specialty within a Specialty. By failing to hire a specialist you put yourself at risk for disappointment. You also significantly increase the risk of losing tens, if not hundreds of thousands of dollars.

While a competent business broker will normally educate the seller regarding the market and business valuations, most of them will price the business in a way to generate the most interest with the least amount of effort.

To get Top Dollar for your business, you need to seek out and hire someone who puts your interest before theirs, and listen to what they have to say.

About the Author Paul Forsberg

I Solve Business Puzzles and Help People Buy, Build & Sell Businesses For Monthly Cash Flow & BIG Paydays. Author #1 Amazon Best Selling Business Book "The 5 Fundamental Elements of Every Successful Business .... Why Most Businesses Cannot Be Sold & What You Can Do About It."

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