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    7 Replies Latest reply on Nov 7, 2007 7:20 AM by LT Lawn Care

    How do you appraise a Small Business?

    CCIGroup Newbie
      How do you determine the fair market value of a small business? Do you use a Formula such as a percentage of the annual gross income? Thanks for the input......
        • Re: How do you appraise a Small Business?
          LUCKIEST Guide
          There are many ways to determine the fair market value of a business. Large or small.
          Are you looking to buy?? or sell?? What kind of business??
          One formula could be a percentage of annual gross income .Another could be gross profit times a number.
          The fair market value of a business could be determined by number of clients, volume,
          the track record based on prior years tax returns adjusted by cash (if any).
          Do you have an Accountant?? A Lawyer??
          Good luck, LUCKIEST
          • Re: How do you appraise a Small Business?
            Lighthouse24 Ranger

            The main factors seem to be the type of business, competitive position, market pressure, and earnings. For a service business where the owner basically IS the business, the valuation-to-profit ratio may only be 1:1. For an established light manufacturing business with stable management, fixed assets, a strong market position, limited competition, and continued earnings that do not depend on any one person, skill, or product, the ratio may be as high as 10:1. One problem is that the financial statements for many small businesses don't really show an accurate earnings picture.
            • Re: How do you appraise a Small Business?
              Ed O'Gee Adventurer
              Earnings, Earnings, Earnings. The key to placing a value on any business is understanding it's earnings? Earnings will tell you how healthy a business is. Usually you take a look at the long and short term profit potential of a business, along with the value of the business assets as well as the business liabilities to gauge the true value of a business.
              • Re: How do you appraise a Small Business?
                jerryd Newbie
                I've done valuations in the past, mainly for larger businesses, though. You can get very complex in your financial analysis, even for a small company.

                My father, however, recently sold his business after 20 years (and subsequently purchased another, smaller version of the same business). Both businesses would have been considered small, though. He did enlist the aid of an accountant and an attorney in both cases, and the valuations that were produced for both transactions were derived from comparisons to similar businesses.

                In a nutshell, the type of business (a veterinary hospital in both cases), drove the valuation. The valuation expert had a database of similar transactions, and applied a range of multiples to calculate base case, high and low valuations. Depending upon whether you're the buyer or the seller, you'll use the high or low valuations as your opening offers in negotiation. You can use the base case to evaluate the final decision. You'll be hard-pressed to do this type of valuation on your own because you won't have access to comparables, so I'd suggest, if you're serious about selling/buying, hiring someone with some experience in your industry - probably an accountant or banker.

                Good luck.
                  • Re: How do you appraise a Small Business?
                    jerryd Newbie
                    By the way, when I say multiples, I mean a multiple of sales or earnings, something like sale price = 5X profits or 1.5X sales. As was noted earlier, financial statements for small businesses (where you'd get the sales or profits numbers) are notoriously unreliable, so take that into account if you're a buyer.
                  • Re: How do you appraise a Small Business?
                    LUCKIEST Guide
                    Just checking in. Bring us up to date. Have any of these suggestions been of help??
                    What is happening?? LUCKIEST
                    • Re: How do you appraise a Small Business?
                      LT Lawn Care Wayfarer
                      Just went through something similar when I was looking to forge a partnership with another lawn care company. I say this will likely vary and this is a subject where the lawyers and the accountants need to get involved. Myself and the other business owner had two different views on how to evaluated the value and health of our businesses, so there are many ways you can look at this.