You’re in the market to sell your business, or maybe you even had a buyer approach you and ask you to name your price. How do you do it? CNNMoney has some tips to consider:
Valuing your business is not an exact science. It depends on many factors. Start by determining the Seller’s Discretionary Cash Flow (SDCF), or your true net profit. To find this, look at your last year’s accounting records to find your net profit (be sure to add back in any expenses you paid out for your cell phone, gas, cars, health insurance and travel – your buyer may not pay for these expenses via the company and it can make your profit seem lower than it actually is).
Let’s play with the numbers:
Your business’s gross income is $150,000. Your cost of goods equals $50,000. So your gross before you factor expenses is $100,000. Now subtract your expenses, we’ll say $65,000 for payroll, utilities, insurance, advertising and taxes. Expenses such as gas, health insurance and travel added another $20,000. So your total expenses is now $85,000.
That makes your business’s net income $15,000. But if you add back in your extra expenses, your SDCF, or true net profit, is $35,000.
No you must determine a multiplier for your business. This multiplier includes factors such as market environment, economic issues, business size, risks to the buyer and your business’s credibility. Typically the small business range is 2 to 6, with many hitting between 2.5 and 4.5; and this will likely be a number that’s agreed upon by both the buyer and the seller.
If you have determined your business multiplier is 3, times that by your SDCF; in this case, your valuation for you business is $105,000.
Source:
CNNMoney: Ready To Sell? How To Price Your Business
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