Small Business Valuation

Can anyone give me a remedial overview of how to value a small business for purposes of buying/selling? (Or point me to a solid resource that does so?)

Have been approached by serious potential buyer, but company is young and we hadn't yet thought about how to determine its value should we decide to sell. Information, tips, warnings, etc. would be much appreciated. After having read many posts on these boards, it seems like there are a number of business-minded and knowledgeable members here.

 

Depends on the business. Do u have any assets?

 

There can be quite a bit that goes in to determining the value of a company and if you are going to sell you should do some serious research...

If you are just looking for a "ballpark number" then assuming the company has some longevity to it you could roughly estimate the value at 2-4 times the company's EBIT plus the liquidation value of its assets.

Again, that is just a rough estimate and while it will come up with a ballpark valuation for many companies, it doesn't work for every business and there are always lots of special cases out there.

As for tips:
- when calculating your value a lot of sellers look at what they think their company will do in the future and try to work that in to the value... unless you have something super special and patents and such to back it up most buyers won't care what you think the potential value is worth because they are taking on the risk themselves and that becomes their reward for the gamble.
- And when looking at your assets look at everything, not just physical assets. If you have a big mailing list or customer database built up that might have a lot of value to it.
- When selling a business you should also consider what you might have to give up (IE: contacts) for the sale and what you might have to do (next part)
- You should find out what your commitments will be, IE: what you will have to do after the sale and if you will receive any compensation. I've sold a few businesses over the years and in some cases I didn't have to do anything, in others I only had to issue a press release (one that they wrote and I had to sign my name to) and in one case I had to be an unpaid consultant for 15 hours a week for three months to handle the transition
- And if there are employees involved you should find out what will be the buyer's commitment to them... are they going to keep your staff on? roll back their wages? fire some or all of them? offer any kind of compensation package?