| A realistic business
valuation requires more then merely looking at last year's
financial statement; it requires a thorough analysis of several
years of the business operation and an opinion about the future
outlook of the industry, the economy, and how the subject
company will compete.
Most people believe that a business should be sold for Fair
Market Value. The term Fair Market Value is defined by the
IRS at Rev. Ruling 59-60 as follows:
"the price at which the property would change hands
between a willing buyer and willing seller when the former
is not under any compulsion to buy and the latter is not under
any compulsion to sell, both parties having reasonable knowledge
of relevant facts."
There are a number of different methods to determine a fair
and equitable price for the sale of the business. The following
lists a few methods to determine the price:
- Capitalized Earning Approach — This method refers
to the return on the investment that is expected by an investor.
- Excess Earning Method — This method is similar
to the capitalized earning method, except that it splits
off return on assets from other earnings.
- Cash Flow Method — This method is usually used
when attempting to determine how much of a loan the cash
flow of the business will support. The adjusted cash flow
is used as a benchmark to measure the firm's ability to
service debt.
- Tangible Assets ( Balance Sheet) Method — This
method values the business by the tangible assets.
- Value of Specific Intangible Assets Method — This
method is based upon the buyer's buying a wanted intangible
asset versus creating it. This method also takes into
consideration valuing the goodwill of the business.
Sell Your Business
It is more than just important to know how, when, and how
much to sell your business for. There is a big difference
between properly preparing your assets to be sold and putting
a for sale sign on the front door. Knowing the difference
can pay big dividends.
Seattle Chamber Of Commerce Resources For Selling A Business
Major issues to consider before deciding to sell your business.
Seller Financing - With as much as 90% of the sales of small
businesses involving at least some seller financing, it may
be unrealistic to expect to receive a lump sum payment. Yet
financing can be tricky, as agreeing to a long period of payments
entails the same type of risk as owning the business and depends
on the business' future success. Alternatives may include
getting the buyer to use non-business assets as security for
the loan.
Employee Stock Ownership Plans (ESOP) - One way to sell
the business to your employees is through an Employee Stock
Ownership Plan (ESOP). ESOPs are tax-qualified employee benefit
plans that invest primarily in stock of the employer. Significant
tax advantages may be available to both an individual selling
the business to an ESOP and the employees participating in
the plan. The many tax incentives and benefits of employees
having ownership in the business make such plans attractive
even when business owners wish to sell only part of their
businesses.
Selling To The Public: Initial And Direct Public Offerings
- Primarily used to raise investment capital, Initial Public
Offerings (IPOs) and Direct Public Offerings (DPOs) may be
a way of maximizing the return from the sale of your business.
Sales Agreement - Checklist of items that must be on the
written sales agreement.
Make Sure The Price Is Right - Find out what your business
is worth before entertaining any offers.
Finding A Buyer - Once you've decided how much your business
is worth, the next step is to find a buyer.
When It's A Seller's Market - Take a look at what happened
to 22 companies previously featured in Inc. magazine's For
Sale column.
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