Buying and selling a business can feel like playing pin the tail on the donkey. People on both sides of the game are trying to hit the right spot, but the person holding the pin is completely blindfolded. One way to pull up the blindfold for a peak at the mark, or the market value of a given company, is to use tested formulas to determine its worth.
Deciding to buy or sell a business is always a difficult decision. Without the proper information to back your play, you are heading into severely uncharted territory without even a compass to guide you.
Before delving into specific formulas and details, it’s important to remember that there is no excuse for not hiring a professional valuation of a company that you are interested in purchasing or selling. Business Valuation experts go to school for years to learn to properly wield valuation formulas, and to make sure that every single detail of a business is included in the final tabulation.
That being said, professional valuation experts usually use a discounted cash flow or price-to-earnings ratio to determine the value of a company. Price-to-earnings ratios are exactly what they sound like, while a discounted cash flow formula looks at the available free cash, then uses a risk factor—determined by looking at the specific market and industry group—to approximate the real world value of the company. Usually, the bottom line factors in a valuation are the revenue of the company versus its expenditures, plus or minus any mitigating factors.
Pricing a business for sale can be very complicated. It may seem like common sense that you should pay more for a company that can earn you more money, but finding out exactly how much more to pay is a highly difficult science. Many different calculations go into getting what amounts to a ballpark figure or educated guess.
Each business model valuation is different, just as each business being valued is different. For example, valuations have to take into account whether or not the new owner expects to be involved in the business. If he or she will act in some managerial position, then any owner’s salary should probably be included on the earnings side of the equation. If the owner expects managers to handle the day to day affairs of the business, then those managers’ salaries are expenses, not earnings.
Analyzing data points like those above are easily done, and no one would warn against a prospective business buyer or seller figuring out as much about a company as they can. At the same time, hidden factors exist which may be glossed over by the untrained eye, or even be factored into the wrong side of the earnings expenditure ratio.
In other words, there’s no excuse for not hiring a professional valuation expert to properly appraise the worth of a given company. This goes for people buying as well as for people selling companies. Give yourself the best shot at finding the right price by letting experts build your business valuation for you.
© Peter Siegel, MBA - All Rights Reserved http://www.BizBen.com * http://www.USABizMart.com -------------------------------------------------- About The Author: Peter Siegel, MBA is the Founder & Principal of BizBen.com – California Businesses For Sale and USABizMart.com – USA Businesses For Sale, two of the most popular business for sale related websites on the internet. He is also the author of three books on the topic of business sales and business buying. The most current book is "Businesses For Sale - How To Buy Or Sell A Small Business". Mr. Siegel also writes a daily Blog – at www.USABizMart.com/blog that covers all topics on selling, buying, valuing, and financing businesses. -------------------------------------------------- Attn: Website Owners & Ezine Editors: Feel free to reprint this article in its entirety on your website or Ezine so long as you leave all links in place, do not modify the content and include the resource box as listed above. Thank you.
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