Valuing a Small Business for Sale Is an Art, not a Science

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There are many reasons a small business owner may want to sell his or her business. The business may have been wildly successful, spurring an offer that makes selling a no-brainer. Another reason is that a longtime owner may have no heirs or employees who want to take over the business and so a sale is an exit strategy. And then there are situations where a sale is forced, either because of a personal issue or a business one. Whatever the reason you are selling your business, you want to get the best possible price, and to do that, you need to use a small business valuation formula to arrive at a price.

There are essentially three ways to value a business for sale. You can look at recent sales of similar-sized businesses in similar industries. Another approach is simply value all the business’ assets to determine a value. A third approach looks at the future sales potential combined with the business’ risk profile. The type of small business valuation formula you use will depend in large part on what type of business you have. For example, the asset valuation approach works better for capital-intensive businesses such as manufacturing. Retail and service businesses are more likely to use on of the other approaches.

When looking to value your business for sale, you will have to assemble some documents. Generally, all you need are a copy of your balance sheet and an income statement. A buyer likely will require you to have at least three years’ worth of these documents. You may need other documents, depending on the buyer and what valuation method you are using. For instance, if you are doing comp sales, you will need that info, and if you are valuing based on future sales, you will need to have projection.

It’s a good idea to engage the services of a business valuation company when looking to sell your business. Such a firm can provide a number of small business valuation services and has the expertise needed to ensure you get a good result with your sale. Such an expert also will be able to gauge the market and advise you to wait on a sale if conditions aren’t favorable. See this link for more references.

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