Putting a price on your business

For the Chronicle

Q: I'm thinking about selling my small business. How can I figure out how to set the price?

A: Valuing a business can be tricky.

In addition to whether or not your business is profitable, there are a number of different factors that come into play, such as how long the business has been around, how many employees you have, the condition of your facilities and equipment, how much inventory you have, the loyalty of your customers and how closely that loyalty is tied to you being the owner.

To determine a solid price, you'll need to get expert advice from a professional appraiser, an attorney and an accountant.

But there are methods you can use to at least come up with a ballpark figure.

One approach is to determine what it would cost to replace your tangible assets, which includes your furniture, fixtures, equipment and inventory.

The theory is that if things don't turn out as planned, the buyer could at least recoup the purchase price by selling off the assets.

Another approach is to base the business value on a multiplier of your projected discretionary earnings, which refer to your pretax earnings, your salary, interest expense, depreciation and any personal expenses you charge to the business.

Using an average of past earnings should give you a reasonable projection of future earnings.

A small business would typically use a multiplier of one-and-a-half to two-and-a-half times earnings.

Find explanations of other valuation techniques at www.businesstown.com/valuing/index.asp.

You can also visit Web sites such as www.BizComps.com and www.BVMarketData.com, where you can purchase recent comparable sales data.

If there are a number of businesses similar to yours
that sold in the last few
years, you can make the assumption that you would be able to sell your business in the same price range as those businesses.

Sites such as www.BizBuySell.com and www.BizQuest.com allow you to make your own comparisons by searching businesses for sale in your industry and location.

The listings include the asking price and details such as average cash flow and whether or not inventory is included in the price.

To find a professional appraiser, visit the American Society of Appraisers' Web site at www.appraisers.org or the National Association of Certified Valuation Analysts at www.nacva.com.

Taking a look at the market value of your business is beneficial even if you don't intend to sell right away.

Jacqueline Taylor is associate region director of the University of Houston Small Business Development Center, a partnership of the U.S. Small Business Administration and the UH C.T. Bauer College of Business Administration. Send questions to: Small Business Houston Chronicle P.O. Box 4260 Houston, TX 77210.

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