***What Is It Worth? Secret Strategies for Evaluating a Business

Richard Parker, professor of our Art of Buying a Business course, tells me that getting a realistic estimate of a business’s value can be a much simpler process than many professional valuators would like the rest of us to believe.nnThe challenge for you, the buyer, is to formulate a price that will provide you with an acceptable return on your investment and also allow you to service any debt, pay yourself and build the business.nnTo give you an overview of how that is done, let me crack open the door of Professor Parker’s virtual classroom and give you a glimpse of the different approaches that his students learn for placing a value on the businesses they are considering. Some of these approaches work well for small businesses, as you will see - and others yield poor value estimates. For sake of discussion, we’ll use the term “small business” for ones with revenue of under $10 million. n

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• Asset Valuation calculates the value of all of the assets of a business. Asset-based valuations do not work well for small businesses. If a small business is “asset rich” but doesn’t make much money, how valuable is the business? Conversely, if a business has limited assets, such as computers and office equipment, but makes a ton of money, isn't it worth more?n
• Liquidation Valuation determines the value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months). As with Asset Valuation, Liquidation Value might be interesting to know about, but it cannot serve to predict the profits that a business will generate for you.n
• Rules Of Thumb Valuation utilizes the selling price of other “like” businesses as a multiple of cash flow or a factor of revenue. Since it is difficult to find two businesses that are exactly the same, the “Rule of Thumb” method is too general to help you know how much a particular business will earn for you.n
• Owner Benefits Valuation calculates the total dollars that you can expect to extract from the business, based on what it has generated in the past. That’s another way of saying, current owner’s cash flow! It is the best method to use to value a smaller business. Of course, a smart entrepreneur can increase the income generated by a business - but it is nice to get a glimpse of how an established business is likely to perform in the weeks and months immediately after you buy it. Remember that valuation should tell you, the buyer, what you can reasonably expect to generate in your pocket.n

n“Above all,” Professor Parker says, “keep in mind that the 'Asking Price’ for any business is not the purchase price. Quite often, the asking price does not even remotely represent what the business is truly worth. Naturally, a buyer’s valuation is usually quite different from what the seller believes their business is worth, because sellers are emotionally attached to their businesses. They usually factor their years of hard work into their price calculation. Unfortunately, this has no business whatsoever being in the equation.”nnI am happy to share this information with you this morning. For even more, be sure to investigate Professor Richard Parker’s Art of Buying a Business course. It can put you at the controls of your own business much sooner than you expect.