The Whys and Whats of Business Valuation

The Whys and Whats of Business Valuation
on June 30, 2012 by in Blog

business-evaluationThe business’ recent profit history is a vital consideration. The general condition of the business including its facilities, inventory, equipment, furniture and fixtures, the completeness and accuracy of financial records, employee morale are important also.

Market demand for the particular type of business in its particular area is another key variable. Economic conditions of the world, the nation or the region that might directly affect the businesses as well as the cost and availability of capital or financing are important considerations. But one of the most important things effecting the price is the future profit potential; the kind of return on investment that a buyer can expect if purchasing a particular business.
Often the assets are less important to the buyer than the profit potential, whereas the seller sees the assets as more important since they had to pay for those assets. An Allen & Young pricing analysis does include asset value in it’s consideration of value attributed to the business. It is important to be aware that businesses, especially small businesses with small market share, often do not change hands at fair market value. There are many reasons for this fact. Among them are the special circumstances (urgency to sell, available cash, motivation to buy, length of time involved, and/or the affinity or lack there of between the seller and buyer). Another factor that affects the purchase price is the tradeoff between cash and terms. The more all cash is required, the lower the purchase price tends to be. The better the terms for the buyer the higher the purchase price might go. Another consideration, often overlooked, is the relative tax consequences for the buyer and the seller. These will determine not only by the pricing, but also by the purchase is structure.
In short, be flexible and realistic about the price for which you will ultimately sell your business. By definition, a fair price for a business is the price which both a willing buyer and a willing seller, both adequately informed of the facts and neither being compelled to buy or sell, would agree upon. However, in the market place, buyer and seller are always acting on different levels of compulsion, emotion, rationale, and determining factors, so the process requires finding a price both can agree to, understand and be comfortable with, and satisfies their interests. It is not impossible; businesses do sell everyday, but require patience and understanding.

–Larry Orenstein

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