Putting a Price Tag on a Business
What is the actual market value of a business?
Putting a value on a business is a separate function from auditing, evaluating or doing “due diligence.” There are three or more generally accepted methods of valuing a business. These are:
- Comparable sales: What have other similar businesses with similar financial information sold for?
- Based on Net operating profit: This is some times called the “Rule of Thumb” method. Based on the averaging many different companies in the same or similar industry. A value is given based on a multiple of seller’s net cash flow or seller’s discretionary income.
- Based on Gross Sales: This is also called a “Rule of Thumb” but based on gross income or company sales rather than net cash flow.
- Based on the fair market value of the assets: This method determines the replacement cost of the assets and good will of the company. When a business is closed or when the assets are worth fair more than the value of the operating business.
Of course the key to coming up with a value for each of these methods is to start with correct data. Any computer is only as good as the information we put into it. This is very true of business valuations. Good information “in” will give you correct conclusions “out.” Since a lot or a little amount, of the information given to buyers is junk, putting a value on a business is questionable, at best. We include on our valuation opinion letters that “based on the information provided we believe the value overall is $100,000. This is based on a combination of the various methods.” We also provide our value for each of the methods. If you later get better information, the valuation can be updated and corrected. The least expensive professional business appraisal firms out in the marketplace start at $1,700.00. The most expensive, do forensic audits and then appraise the business, for a costs of about $7,500. Business owners use these reports for divorces, partnership liquidations, IRS purposes and to show to prospective buyers to justify their asking price. All the appraisers, except for the most expensive service, are using the financial data provided by the owner without any review of the source data.
We offer a basic valuation based on the provided data available at the time. The fee is a flat $700 per business. This can be done before a review or audit of the business has been done or it can be done after the business has been dissected and studied. The price includes a review of the financial statements to determine their reliability. Then based on the facts given, we will give you our opinion, and if you get better information at a later date, we will update the valuation at no additional charge. We suggest that you do what the sellers do and use this report to explain or justify to a seller why you are offering the price you are. Remember, “What is good for the goose is good for the gander.”
Feel free to ask the office any questions you may have about this service.