How do I determine the value of an existing business?

We are considering purchasing an existing embroidery and advertising specialties business. We would like some guidance in how to value the business. We have researched the value of the building, embroidery equipment being used and related materials (hoops, stabilizers, threads, etc.) and determined that many of the samples are provided by manufacturers to encourage purchase of their products. We feel the business is overpriced based on what we have found, but do not know how to value the current customer list and relationships built with vendors. Any help to find a direction to research would be helpful. Thank you.

Answer by Tim Berry

Good question, and there is no simple answer to it. For purposes of searching on Google or Yahoo!, what you're talking about is called "Business Valuation." There are some software tools you can buy, and there are experts you can hire, and many different formulas you can use, but ultimately, the business is worth what somebody will pay to buy it - no more, no less.

Here are some articles and opinions that you can read on the web:

• I have a long post on my blog http://blog.timberry.com/2007/01/q_a_selling_out.html
• Small Business Trends recently recommended bizbuysell. Here's that article: http://feeds.feedburner.com/~r/SmallBusinessTrends
  /~3/149378140/value-your-business-in-ten-minutes-a
  t-bizbuysell.html
• There are a lot of other possibilities out there. Do the web search.
  

And aside from that, experience is very valuable. Work with a business broker or small business attorney or CPA who has some knowledge of the background of that business.

Sometimes people will do a business plan to determine future cash flows as a means to develop a valuation analysis.  The business plan helps you think about the value as a matter of future cash. Sometimes the sellers will offer a business plan, and in that case you have to look at it carefully, with a healthy skepticism.

Tim Berry is the president of Palo Alto Software Inc., which produces the industry's leading business planning software, Business Plan Pro, as well as other popular planning applications for businesses.

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