WHAT IS YOUR BUSINESS WORTH?

When valuing a business, the main element is the future income. One method to consider is the "Three Year Weighted Average." This approach uses three years to provide credibility, yet it puts the most weight on the immediate past year.

First you must adjust the three prior year profit and loss statements to allow for proper compensation for the owner, and to eliminate family expenses that may have crept into the company expenses. Now, multiply the profit or loss for the immediate past year by three; the second year old net figure by two; and the third year old figure by one.

Total your three answers and divide by six. You now have the "weighted average" for the prior performance with the greatest weight being applied to the immediate past year.

Divide the weighted average profit by your desired percentage return. This will provide you with a rought guideline as to the value of the business. Remember, you adjusted the profit and loss figure before you started your computation to allow for a proper return on the proprietor's time.

The investor who is happy with an eight percent return would be willing to pay a higher price for a business than an investor who demands a twelve percent return. Some buyers are satisfied with a lower rate of return on their investment, if they are also securing a full-time self-employment position.

Ultimately the business is valued on the amount of money it's expected to generare for the owner, as well as its associated risks. A way to measure these risks is to examine the business' cash flow or expected income. The general formula is that a business' selling price should be three (3) to five (5) times its cash flow, with the higher end being more appropriate for a bigger business. Therefore, if the firm produced a net profit of $100,000 last year, you might expect to buy it for $300,000.

Remember, though, these are just generalities and they don't account for the risks of an individual business, says Rick Shaffer, an Aurora, Ill business broker. Specific economic factors affecting your industry can change the valuation. For example, if you were buying a business that schedules Asian tours, the value of the firm could be affected by how the dollar is expected to perform.

That is why it is worth hiring a professional valuator; in fact, your lender may even require you to do so. A valuator can fully analyze all the conditions affecting the specific business. And the valuator will have information about the amount that other similar businesses have recently listed and sold for. This data isn't public, but certain agencies track sales and appraisers subscribe to their services.

Your business broker or accountant can usually point you toward a valuator. Expect to pay an hourly fee for the person's services, but it is well worth every penny.

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