Wednesday, March 12, 2014

The value of business

The U.S. economy is especially hard on small local businesses in 2009. Most sales of Allah (and the corresponding value of their business) fell greatly. But in any economy, no company better days are behind them. It can cause a mature product line, holding too many companies in debt, new or increased competition, the management expires or all of the above. While continuing to decline (or no) income, what options an owner of small business must appreciate the business for sale?

Most businesses will be assessed using multiple industries (typically 2-3) times the owners of free cash flow, however, it is an optimistic approach that assumes a healthy business with a positive historical development. The possibility of comparison companies used in the calculation of few industries grow and historically profitable companies. Therefore, to explain the current state of business, additional steps are required.

There are three (simplified) way to appreciate the declining business for sale.

1 - Apply a discount (20-30%) with the calculated value of a multiple of free cash flow. However, the amount of discount is a random number that is difficult at best to justify.

2 - If the decline is reversible (to have better management, more money for operations, etc.), can be valued based on financial education in the future business. Owners will be conservative predict revenues and costs over the next 12 months, calculate the free cash flow of the business and the implementation of industry standards for some sound business.

3 - If this reduction is not reversible, you may be able to assess the business based on tangible assets owned by the company. The purpose of this method is to get the best price for the hard assets of the business. Should add a proprietary current market value of inventory, raw materials, tools, fixtures, and equipment to arrive at the total market value of the tangible assets of the business. If this value is higher than # 1 or # 2 above, then the part of the business is worth more than the whole business. This should eliminate the owner of the mark by selling assets separately rather than continuing with the sale.

Whatever method you choose, if you continue to deny your business you have to be prepared for an aggressive price. No definition of 'follow the market' down periodically - any time chasing prospective buyers could potentially reduce the price even further. Be a realistic, price to sell the business and move to the next, and hopefully more profitable, business.

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