Get to know the value of your business (Part 2)

Last month's tip focused on various methods used to value a typical business.  The nature of your business (retail, manufacturing, service) and its past performance will help determine how you arrive at a value.  But after all the computations are said and done, the value will still be in the eye of the buyer and the seller.

Watch for factors that may affect your business value.  If a buyer is happy with a 20% return on investment and your business has been running say $100,000 per year net profit, the value might be in the neighborhood of $500,000.  Is that the true value?  Following are some things to consider:

• When the business sells, will the customers leave?

• Does the asking price include equipment that is worn out or obsolete?

• Does the business sell a product or service with decreasing demand?

• Are there pending or potential lawsuits against the business?

• Have there been any environmental violations (known or unknown)?

• Are there credit problems with major suppliers?

• Will there be a downturn in your industry?

• How likely is the potential loss of a large customer?

• Is there major new competition such as a superstore or mall?

• Does the business face the loss of a favorable vendor?

• Will local zoning changes make it difficult to remodel or expand the building?

• Are there favorable building lease terms which are about to expire?

A knowledgeable buyer will seldom pay a premium for what he or she can do to improve the business.  In other words, the fact that the buyer may be able to double the sales will not get you a higher price.  However, you might get a better price from a competitor for a couple of reasons.  Your competitor may be able to improve on your net profit by eliminating some expenses such as staff, equipment, or building rent.  And of course, your added sales may improve your competitor's marketing and buying channels.