Determining price of a business
Is there a formula to use in determining what a business is worth when selling it?
Business valuation is similar to real estate valuation in that comparable sales are often used as a basis. Formulas and methods that are often used include:
- A multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) might be used, as this represents the net cash inflow before capital expenses and thus what might be used to repay debt.
- A multiple of Earnings is used in some industries where the expense and cash flows are sufficiently understood to make underlying assumptions about the future of the business
- A multiple of asset values
- A formula based on the projected future earnings and stock appreciation
- The value of the synergistic combination with another entity
Ultimately it comes down to what a buyer is willing to pay for the opportunity to own the business. The due diligence process conducted by the purchaser will likely lead to the calculation logic and subsequent price that works best for all parties.
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Related Categories: Accounting, Finance, Taxes, Business Buying And Selling, Financial Planning, Negotiating
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