Step 3: Setting the right price

Valuing your business

Determining the value of your business is the most contentious part of selling. You want to set the highest price the market will bear so that you are rewarded for the years of hard work you've put into the business, while the buyer wants the highest future profitability for the lowest price.

The following four methods are often used to determine the value of a business.

Return on investment (ROI)

This technique uses net profit (before owners salary) to determine value.

It measures the return (ie: net profit before owners salary) received from an investment (ie: purchase price) and is calculated by the following formula:

ROI = Net Annual Profit x 100
        price

Alternatively, you may have a desired ROI you wish to achieve and want to calculate a price for your business.

The ROI formula above may also be expressed as follows to determine the value of your business:

Price = Net Annual Profit x 100
           ROI

Asset value – going concern

This technique adds the tangible and intangible assets of the business to determine value. It is sometimes referred to as the book value of the business.

Tangible assets are items such as inventory, plant and equipment, tools, land and property, vehicles, and furniture . Be sure to only list assets the business owns and can be transferred to a buyer and not those that belong to the landlord of leased premises such as plumbing, an air-conditioner or partitions.

Intangible assets include goodwill, patents, client lists, trademarks, a strong brand name, good customer relations and good employee relations.

Goodwill reflects the value of intangible assets and is defined as the excess paid over the value of a business's assets (book value). Because of its intangible nature, goodwill can be difficult to value. However, it should be based on the overall value and future profitability of the business.

Market value

The market value technique is based on multiplying the turnover of the business by an industry multiple. This method is most commonly used to value professional practices such as legal, veterinarian or insurance brokers.

Make sure you have a good understanding of the current marketplace and are aware of industry standards. Research the current market for businesses similar to yours, compare prices and set a price that the market will bear. This is not a very satisfactory method because two similar businesses can have the same turnover but very different profit levels.

Cost of creating the business from scratch

Ask what it would cost to start a business similar to yours. Costs could include buying equipment, employing staff, developing products, attracting customers, and so on. It may be possible to estimate this "entry cost" as a benchmark for determining the value of your business.

Obtaining professional advice

Obtain advice from your accountant or financial advisor on how the sale of the business will impact on your particular financial circumstances.

Accountants will also be able to help with determining a value for your business and may even have potential buyers among their client list.

Business brokers are professionals who sell businesses in a similar way that real estate agents sell private property. In Western Australia , individuals, partnerships or companies operating as real estate or business agents are required to be licensed.

Before engaging a business broker, ensure they are registered in the licensing system administered by the Consumer Protection division of the Department of Commerce (from 1 July 2011, responsibility for the regulation of the real estate industry in Western Australia was transferred from the Real Estate and Business Agents Supervisory Board to the Department of Commerce and the Commissioner for Consumer Protection).

Talk to the Australian Institute of Business Brokers about what to look for in a business broker and how to find one. You can also find a business broker by searching the yellow pages.

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