The value of a typical small business should be greater than the total values of its tangible assets. For a buyer, the appeal is that an ongoing business has everything necessary for successful operation — equipment, location, and inventory if applicable, not to mention experienced employees, suppliers, business processes, and a customer list — all in place, in the right amounts.
These intangible assets are frequently referred to as goodwill or going-concern value. But how do you put a price on goodwill or going-concern value? In fact, how do you determine the true market value of the hard assets used in your business? The answer is that you make a business appraiser a key player on your selling team.
Many business owners don't want to spend the time or money to have an appraisal done. However, trying to save money on the appraisal, is likely to be to your disadvantage. Guessing at the value of your business is likely to result in either a price that's unrealistically high and turns off many potential buyers, or a price that's unnecessarily low and keeps you from cashing out at full value.
Business appraisers generally are certified public accountants (CPAs) that have specialized training and experience in business appraisal techniques. As a profession, they have established a number of ways to quantify the value of key aspects of your business, and roll them up into an overall figure. As part of the process they will write up a valuation report, which explains in detail how they arrived at their final value. Having a valuation document prepared by an outside expert adds a great deal of credibility to your asking price, because the buyer will be able to see exactly how you arrived at your final figure.
Keep in mind that if you sell out to a larger company, you'll probably be dealing with MBAs who are used to seeing sophisticated financial analyses. They will be much more comfortable going through with the sale (and much more impressed with your management ability) if you have a detailed appraisal prepared.
On the other hand, remember that value is in the mind of the beholder. A professional valuation can tell you the price that an average buyer might pay for your business. However, when it comes to negotiating with an actual buyer, the appraisal is just a starting point. A particular buyer may have a strong strategic reason for acquiring your company, and may be willing to pay a premium over what the average buyer might offer. Another buyer might simply be looking for certain assets to augment his or her own business, and may not be willing to pay for your company's going-concern value at all. It's important that you and your business broker size up the particular buyer's reasons for acquiring your business before naming a price.
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