What Is Your Business Worth?

Determining how much you should ask for your business is a complicated process that is best done with the help of a business broker and an accountant. Audited statements prepared by a reputable accountant will help establish your business credentials. Tax returns also offer proof of business performance. Generally, three years of financial records will serve to establish where the business is going and its profitability. Among the items you'll need to gather are:

Ways to value your business. There are various methods for valuing a business, each with its limitations. One method involves calculating net worth by subtracting liabilities from assets. Fixed or tangible assets can include everything from machinery and office equipment to inventory, receivables (you may have to guarantee their collection) and prepaid expenses, such as taxes and deposits. On the other side of the balance sheet are liabilities; items that may reduce the selling price of your company. They include payables such as salaries, bills and periodic expenses, short-term bank notes and/or long-term loans, as well as federal, state and local taxes. One key drawback to this valuation method is that it does not take into account the profit or earning potential of the business.

Another method of valuing a business is based on its income or profits and the return on investment that a buyer could reasonably expect. However, since small business owners often write off everything they legally can in order to reduce taxes, their profit margin may appear to be smaller than it really is. It behooves you, as a seller, to prepare an itemized profit-and-loss statement that shows what excess cash your business generates, not simply what your final profit was for tax purposes.

Be wary of trying to set a price on your business based on simplistic formulas, rules of thumb, or on comparisons to the amount paid for similar businesses. Unlike home sales in a particular real estate market, there are usually too many variables among businesses to make truly useful comparisons for pricing purposes.

The Value of Goodwill. If establishing the net worth of your business is straightforward, determining the value of an entity created through your personal efforts is more subjective. Goodwill is the single most difficult portion of your business to put a price on. Its worth isn't part of a balance sheet. Your reputation and relationships with your customers, vendors, and the community, along with your participation in trade-related activities, all contribute to goodwill. In fact, your customer list may be among your business' most valuable assets.

In the final analysis, your company is worth what someone will pay for it, and no more. Generally, a potential buyer's offer will be influenced by how soon he or she expects to see a return on the initial investment. Five to six years is usually considered a reasonable length of time to recoup the initial investment. Among the other factors that will influence a buyer's offer are the age of your business, how easy or difficult the business is to operate, and the economic climate, both locally and nationally. Again, get professional help in setting a price and negotiating the sale of your business- it can really payoff in the long run.