Considerations

• Value of Assets & Inventory

• Goodwill or Badwill

• Ability to Generate Profit

If you are thinking of buying or selling a business, the first question that comes to mind is, "What's it worth?".  Many methods are used to value businesses, and none of them are perfect.  The following considerations may be used to arrive at a figure for negotiation, but the final value will be determined by the market - that price which the buyer is willing to take and the seller is willing to give.

Value of Assets & Inventory - The value of the business's assets and inventory is a good place to start.  Compare book value to market value, and ask whether the assets are truly needed to continue business operations.  Many times a business has accumulated assets or inventory that have become obsolete and are simply dead weight.

Goodwill or Badwill - Is there any real value to assuming the operations, or could you open a similar business next door and do just as well?  Does the business name have market presence?  Would the customer base be difficult or expensive to come up with on your own?  If the business has a good reputation, it may worth more.  If it has a bad reputation, it may be worth less than nothing.  If the business has developed a process or system that would take time to learn and implement, that may add value.

Ability to Generate Profit - If the business has no proven ability to generate profit, it is worth no more than the hard assets plus inventory, and probably less.  Assets and inventory can be purchased anywhere - the ability to generate a profit cannot.  A multiplier can be applied to the true net income of a business to determine the value it should add to the asking price.  The multiplier used will depend on an overall assessment of the business, but the average is 4.  The profit trend should also be considered - are profits increasing or decreasing?

Other Considerations -

• Unreported cash or profits - worth $0

• Environmental liabilities - check out thoroughly

• Claims or judgements - check out thoroughly

• Is industry growing or declining?

• Is seller willing to finance the sale?

This information covers only basic tenets for valuing a business; it is not intended as legal or tax advice.  The SBDC provides assistance for business valuations, but for legal or tax advice please seek out an appropriate professional in those professions.

Notes

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