There is no one formula for determining the value of a business. Many variables affect the price. The most important variables include the most recent profit history, general conditions of the company and the accuracy of the records.
The market demands affect the future of the business. The price reflects the economic conditions of the individual business and the general community where the business is located.
The sale usually involves real estate, and a key factor becomes location, location, location. Financials and capital (cost and availability of capital) will be directly affected by any local economic factors.
The state of good will and the ability to transfer goodwill or other intangible values to the buyer can impact the sale price and future profit potential.
All of these things will come into play in arriving at an agreed upon price. They will be further modified by any special circumstances of the buyer and seller.
There can be tradeoff between cash and special financial terms, and finally the tax consequences for the buyer and seller.
The definition of a fair market value is the price at which the property would change hands between a willing buyer and a willing seller.
Both are adequately informed of all material facts and neither being compelled to buy or to sell. Recognize the buyer and the seller are always acting under different levels of compulsion.
Rule-of-thumb and quick-and-dirty formulas should not be used for pricing a business, as they address only a few of the factors that impact a business value. The use of comparables for value has many of the same shortcomings as quick-and-dirty formulas.
The balance sheet methods of evaluating the assets of the business are often used when the business being valued generates earnings primarily from its assets.
It is more common to use an income statement method of valuation. These methods require the services of business professionals. An attorney and a CPA who has experience in buy-sell agreements will carefully evaluate the business and develop cash flow projections to help the buyer or seller structure the sale to help the client as needed.
If you are considering the purchase or sale of a business, Lowcountry SCORE Chapter 650, Counselors to America’s Small Business, can help you. SCORE Counselors provide free confidential counseling. In Beaufort County call 843-785-7107. In Jasper County call 843-726-8126. Contact by email at email@example.com or visit www.scorehiltonhead.com.
- J. Le Tourneau is a counselor with Lowcountry SCORE.