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You may want to check out some books on this topic. Check out the author L. Tuller who is a graduate from HBS and Wharton. He has a book out on how to determine the value of a small business. Good luck!
This is how to start the process:
1. Add up the purchase price of all salable inventory. If you can't sell the stuff in inventory, it has no value.
This gives you a startign point for your future determinations only. This does not set a final price/value. With the aforementioned numbers, visit your banker.
Hi There Mozart -
Thanks Score133. I'm debating whether or not to invest in a new business. I appreciate this extremely helpful advice.
There is no surefire way to value a company for buying and selling purposes. The true value is the perceived value to a buyer who is ready, willing, and able to buy it. But here are some different methods of establishing value used in the M&A industry (you can find out details about them by using the phrase in a Google search or just search for "business valuations"):
Capitalized Earning Approach
Excess Earning Method
Cash Flow Method
Tangible Assets (Balance Sheet) Method
One of the most common approaches to small business valuation is the use of industry rules of thumb. While most financial analysts cringe at the use of these approaches, they do have their place, which we believe to be as adjuncts to other methods. One industry rule of thumb says an Internet Service Provider company is worth $75 to $125 per subscriber plus equipment at fair market value. Another says that small weekly newspapers are worth 100% of one year's gross income.
The problem with these and all rule of thumb formulas is that they are statistically derived from the sale of many businesses of each type. The rule of thumb averages may be accurate for those businesses whose performances are right about at the average. The business with expenses and profits that are right on target with industry averages may well sell for a price in line with the rule of thumb formula. Others will vary. To apply the rule of thumb to a business that varies significantly from the average is not appropriate.