Business Valuation

[S T]

Can anyone recommend a not too expensive business valuation software?

Have a couple of clients that would like to sell small businesses, but don't know how to value - service business with customer lists, some assets and possibly a phone # with advertising. Probably under $100,000 - $150,000.

Business Brokers have been contacted, but state that the business is too small for them to bother with. So client will have to advertise and try to market on their own.

Thanks,
Sandy

[Bees Knees]

Business Valuation

The biggest problem with a service type business is usually the owner or key employees provide the service and therefore any goodwill built up is due to the owner’s or key employee’s personal efforts. For example, how could the Beatles sell their band to someone else and expect to get much for it? They could sell the rights to Albums and CDs already produced and songs already written, but without John, Paul, George, and Ringo doing the show, future CDs produced and songs written by new management with new musicians would obviously not be worth as much. Slapping someone’s name and reputation on work performed by others has very little value, unless the customers do not know who actually was originally providing the services.

Goodwill by a service type business that may be marketable would be a business that has a work force in place that will not leave and go off on their own after the sale. For example, an accounting firm with one accountant would get a much lower price for selling a customer list than a firm that had 20 professionals working as non-owners. There is a chance many of those non-owner professionals would stay with the firm after the sale and continue to service their clients without bolting and going off on their own.

This is also a good reason why it is important to secure non-compete clauses with your work force. If you do not have a non-compete clause and your employees are free to mutiny after the sale, the value of your business is nowhere near the value it could be if those same employees were tied in with the sale with a non-compete clause.

Assuming you have a service business that is not heavily dependent on people who may not be their after the sale, goodwill can usually be established by some kind of formula of average net profits multiplied by a factor anywhere from 1 to 5. For example, lets say you average $100,000 net profit over the past 3 years. Assume the salary cost of a manager to replace you is $85,000. The average net profit (for selling purposes) is now only $15,000 per year. Lets assume there is medium growth potential in your industry (2.5 on a scale of 1 to 5), no competition in the area (5 on a scale of 1 to 5), and average to slightly better than average economy in the local area being serviced (3 on a scale of 1 to 5).

Under this formula, the value of Goodwill is $15,000 X 3.5 = $52,500. Assume the fair market value of all tangible assets equals $40,000. Total sale price of business would equal $92,500, which is less than one year of profits you made while you were running the show. But you have to keep in mind that in this example, 85% of the profits came from your personal efforts. You can’t market your own personal efforts or that of key employees who are not tied in with the sale of the business.

[S T]

Factors

Assuming you have a service business that is not heavily dependent on people who may not be their after the sale, goodwill can usually be established by some kind of formula of average net profits multiplied by a factor anywhere from 1 to 5. For example, lets say you average $100,000 net profit over the past 3 years. Assume the salary cost of a manager to replace you is $85,000. The average net profit (for selling purposes) is now only $15,000 per year. Lets assume there is medium growth potential in your industry (2.5 on a scale of 1 to 5), no competition in the area (5 on a scale of 1 to 5), and average to slightly better than average economy in the local area being serviced (3 on a scale of 1 to 5).

Bees, thanks for the information. Now, how to arrive at the formula or the factor 1 to 5. Do you know where I can obtain more information.

Sandy

[Bees Knees]

Business Valuation

The Small Business QF has a worksheet in Tab A. The Deluxe Edition TaxBook Tab 25 is advertised to have one. But as to coming up with the 1 to 5 factor, that is pretty much highly subjective and a matter of opinion. If you can't find an appraiser, I would use the worksheet in the QF and have the client have several different people give unbiased opinions on how they would rate the 1 to 5 factor for each variable.

[S T]

Many Thanks

Wish I had the Deluxe Tax Book in hand , so for now will use the one in QF Small Business.

Sandy