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Whether you want to Buy a Business or Sell Your Business - Let me ask you, have you ever wondered how to value a business?
| Guest post by: Lee Artis |
Article Overview: Have you ever wondered how to value a business? Business valuation methods vary depending on whom you ask. Many business brokers use the common multiple method. For those who are searching for a business to buy or business owners looking to sell their business, valuing a business can be somewhat confusing. To gain a better understanding how business brokers value a business, I have provided an example. See why there is so much confusion and how you can overcome it yourself.
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Free Download - Does Your Small Business Plan Involve Selling Your Small Business? By Lee Artis |
Whether you want to Buy a Business or Sell Your Business - Let me ask you, have you ever wondered how to value a business?
A couple of weeks ago I stumbled upon an old post from a forum I frequently visit. Someone was asking a question about how to value a business and how they should go about valuing a business. 12 people were good enough to reply. It didn't surprise me when all 12 replied with totally different solutions on how to value a business. You would have to assume that those taking the time to respond were pretty confident that they knew the correct answer. It got me wondering where they actually got their methods from and just how much confusion this subject creates, not only business buyers and sellers but with almost everyone including accountants and business brokers!
So, you may be asking "how do I go about establishing the asking price of a business"?
The Business Brokers Method for Valuing a Business
Business brokers use this method to arrive at the asking price for a small business; it is calculated on the adjusted net profit using the most recent profit and loss statements supplied by the seller. The business broker will look at all the business expenses to see what they can add back to profit. This is usually referred to as add backs or recasting. The adjustment is made by adding back to the net profit - the total amount of non-essential or discretionary expenses, which are not necessary to run the business, so to show a more accurate net cash flow for the owner.
The business may also have unaccountable business expenses. A clear example may be the business rental expenses, if the owner also owns the freehold and is looking to sell the leasehold only, you would need to make certain that the rental expenses were correct and adjust the profit if necessary - in this case it would be adjusted downward.
Once this number is determined, the following step a business broker will take is to multiply the adjusted net profit usually by 2.5 times and they have their figure.
Let me share an example of the business broker method with you.
Business A: Established 12 years, trades 9-5 Mon -Fri with consistent sales, strong industry growth, selection of quality suppliers, and abundant customers etc.
Business B: Established 2 years, operates 7 days a week, sales are inconsistent, cut throat industry with aggressive competition, and it only has one customer.
For this example, both businesses A and B show $100,000 adjusted profit after the owner operator wage is taken out. The business broker will then use the same multiple on both businesses i.e. 2.5 x $100,000 = $250,000. This will include stock, the written down value of the plant and equipment and the goodwill.
As you can clearly see this method does not make a great deal of sense.
As a business buyer or business seller it is important for you to never assume that the asking price of the business is anywhere close to the correct, value even when it is set by so called professionals.
You can be talking hundreds of thousands of dollars either way. Frightening!
The good news is that there is a way you can accurately value any business with peace of mind that it will be valued on its own merits. My advice is to use a valuation software tool which has been used by certified business valuation practitioners and provides a clear method of taking everything about the business into account for an accurate result.
p.s ..and for sure, it must be easy to understand and use
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About the Author: Lee Artis RSS for Lee's articles - Visit Lee's website Lee has 12 years experience on both sides of the fence selling and valuing businesses of all types and sizes for her clients as well as acquiring corporate businesses as a buyer's agent. Prior to her successful business sales career she had an entrepreneurial background and built several successful small businesses. Her last business was the manufacture and distribution of a range of clothing for women and children Lee had manufactured in Fiji for distribution throughout Australia. Her passion is small business and developing innovative, internet centered commercial businesses of the future. Lee is a visionary and has the ability to see new and creative ways to transform old fashioned, traditional businesses. Lee's industry experience gives her insight into a new way of buying and selling businesses without the expensive involvement of business brokers. Her belief is so strong that she joined Terry McDonald to write this series of books and published articles to equip people with the skills they need to buy or sell a business themselves. For the most cost effective, comprehensive, easy to use DIY Kit (complete with detailed guide and highly regarded Small Business Valuation Software Tool) - For Business Buyers, Business Owners and Business Advisors visit The Bizbuy Kit or The Bizsale Kit Click here to visit Lee's website   Tips for Buying a Business Tips for Selling a Business |
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- 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read
- this is a fascinating book about the history of Business theory, and I'd recommend it to anybody.
2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto.
3. PADI: The Business of Diving Book
Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Exclusive: Interview with Results
- Hi Forum Members,
I'm helping start up a Business Coaching and Consulting company here in Toronto, Ontario, Canada (a Subsidiary of RSC Business in Los Angeles).
As a Research and Development Intern I am required to practice my listening and interview skills by surveying Small and Medium Businesses on thier Business.
This Survey is designed by RSC Business to also assist the Business being interviewed more insight into their own business.
I am looking to interview about 30 businesses across North America over the span of 3 months.
At the end of these interviews I will be publishing a report of the results and they will be made available for free to the Interviewees. The Report data will include responses from a minimum of 100 interviews.
I would like to extend this opportunity to members of the Forum.
If you would like to have this short 20-30 minute interview conducted on your Business and you reside in North America please send me an email or PM.
Please contact me at andy[at]jvprosperity[dot]com to arrange our interview and to get free access to the results when they are published.
Re: HOw to market a B2B consulting company
- [quote="zohahunt77":428owzbi]Hi, I was wondering if anyone can tell me the difference between B2B and B2C. I don’t know about b2b marketing but I have done marketing so know things about it. I will suggest you to take online services which will spread your business all over web network. Online marketing is the best way to market any business.[/quote:428owzbi]
B2B = Business to Business - You are marketing to other businesses.
B2C = Business to Consumer - You are marketing to consumers.
Re: Website Name Help
- Its good that you have come up with the idea of setting up a website for your business. Now As it is into Business Solutions, I would recommend that you also include this into the name of the website. This will help you getting better results as far as SEO is concerned. You can start building a brand with this name. As you have already got the name booked, you can try changing it to something on the lines of Business Solutions as in azimabusiness or azimabusinesssolutions. Its a long name but still is good from the SEO point.
English teachers learn Japanese as Interns
- Yasunori, what about the many students that leave N. America to teach English in Japan. They may want to learn Japanese (maybe Business Japanese is a bit different) and the Japanese Business Culture.
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