When it is time to sell a business and place a realistic estimation on it, an entrepreneur will often consult a business valuator, or try figuring it out themselves using various business valuation formulas. However, one may try figuring out their business’s value, there is no precise answer to the question of how much your business is worth. A lot of books have been written on the subject of ‘How to have an estimate value on an established business’, it would be tough to find more than one specialist who arrives at the same price.
So how do you really arrive at a value of an established business? Some of the most commonly accepted techniques and rules are outlined below:
On The Basis Of Sales – Using sales as a foundation for the estimation of a business is generally the best approach for services related businesses that tend to generate a fixed percentage of profit vs overhead and small retained earnings. They may comprise of insurance brokers, consulting firms, PR agencies, temporary firms, professional practices and alike. Each business is going to use its very own multiplier of their yearly sales to arrive at a selling price, which is based on the business type and other variables. The multiplier is generally adjusted to account for changes in competition, demand, the amount of risk the particular business assumes along with the prevailing industry trends.
Profits or Cash Flow – In this regard, the sale price of the business is determined keeping in mind its ability to generate a steady profit or stream of cash flow. By projecting the cash flow stream over the period of 5 to 10 years, a business valuator can easily calculate the net worth of the business. Because the cash flows are projected over a certain period of time, interest rates also play a vital role, meaning the profit earned in the fourth year will be less valuable than the revenue earned in the first year. The calculation method is called as the ‘net present value’ technique.
A professional business consultant or valuator perhaps are able to recommend different ways to more accurately calculate a fair business selling price. Because they know about the various factors that may affect the multiplier and can rapidly access the current state of the business, experts are generally more adept at coming up with an accurate price.
There are no hard and fast rules on how to evaluate the value of an established business. On the other hand, the two techniques mentioned above are the most commonly accepted ones in this regard. Nevertheless, to make sure that you will be close to the best or actual business value, it is best that you hire the services of a professional business consultant or valuator in your area. This would certainly help you quote the best possible price for selling a business, and being a buyer, you would be certain that you are not over spending. Finally, there are some shortcuts if you don’t want to take too much time to consult a valuator. You can check online marketplaces such as Businesses Buy Sell to sell your business in a quicker way.