how to determine a business worth?

[lizzy]

Our shop may be going through some changes. we want to establish the market value of the business, not the property. Is there a good and fair way to do this? we want to do it before making some changes, both in operations and the partnership. I know comps are a typical way, but our shop is more successful than the ones I've seen for sale because they were going down. any advice?

 

[cafemakers]

Hello Lizzy,

You may want to check with the SCORE website for some information on this topic, including the following:

Myth III: A local competitor sold his business for three times revenue six months ago. My business is worth at least this much!

Maybe yes and maybe no. What happened six months ago is not really relevant to what something is worth today. What your business is worth today depends on three factors: 1) how much cash it generates today; 2) expected growth in cash in the foreseeable future; and 3) the return buyers require on their investment in your business. First of all, unless your firm's cash flows and growth prospects are very similar to the competitor firm, that firm's revenue multiple is irrelevant to valuing your firm. Moreover, without getting into the nuances of finance, even if the competitor firm was equivalent to yours in every respect and both firms were sold today, if interest rates were higher today than 6 months ago, the firms would likely sell for less than three times revenue. Conversely, if rates were lower today than six months ago, the firms may be worth more than three times revenue. In short, the value of your business, like the value of IBM stock, is likely different today than six months ago because economic conditions have changed.

...and this: http://www.score.org/valuing_small_business.html

My suggestion is that you have an independent outside party with experience in these areas provide an appraisal of the value of your business.

Best regards,

Andrew