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Valuing the Business

Before seeking a buyer there are some important questions that sellers should ask themselves. First off, can your business be sold? Several elements of a business make it an attractive buy. It has a solid history of profitability, for instance; a competitive advantage; a large and loyal customer base or long-term contracts with clients; and, growth opportunities. Other considerations are brand loyalty, intellectual property rights, licenses, or issued patents.

For both seller and buyer the bottom line is what's your business worth? This is evident in the valuation. You of course want maximum value for your business but setting an asking price too high could raise a red flag, scaring away potential buyers. But if you price it too low, you'll lose out.

According to the International Business Brokers Association, a company's value is determined by a compilation of factors such as sales, earnings, performance, market outlook, personnel, net book value, and the fair market replacement value of equivalent operating assets. Value is also influenced by intangible assets such as a company's brand image, industry reputation, and good will.

It basically comes down to what the buyer is going to value and how much the buyer is going to make in future earnings. Future earnings are everything. The way that buyers value future earnings is to look at past earnings.

Businesses are typically sold for a multiple of the earnings or cash flow. Things that affect that multiple could be the type of industry; manufacturing tends to get a higher multiple than retail. Anytime you own the product or patent that is much more desirable. Other factors are whether the business is trending up, down or flat.

To get a fair and reasonable price for your business, you need good negotiating power working on your behalf. Consider hiring an intermediary such as a business broker. The intermediary's job is to determine the appropriate value for your business and to find the perfect buyer to purchase it at the asking price.


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