What to Consider When Buying or Selling a Small Business
By Susan M. Keenan for GoldAllianceGroup.com

Quite a few factors should be taken into consideration when buying or selling a small business that generates less than $1.5 million in revenue. Primarily, this is because each of these factors plays a critical role in determining the true value of a small business.

Individuals looking to either buy or sell a company generating less than $1.5 million would do well to hire an independent and accredited appraiser, business broker or CPA offering business valuation services in order to properly identify the value of the company. A brief introduction to the primary facets that should be considered when buying or selling a small business is presented here.

Points to Consider When Buying or Selling a Small Business

The nature and history of the company including its length of existence, location, age of equipment, reputation, and major competitors should all be considered by a potential buyer or seller in determining the value of the business.

Market projections and the general outlook in the company's industry are all important factors to consider for a sale or purchase deal since they provide an indication of revenue potential.

The current financial condition, the book value, and the earning capacity of the company are all important financial considerations that should be thoroughly checked out.

The share of the profits or the dividends paying capacity of the company can also be used as a barometer for the success of the business and as such, it is important to look at these.

The intangible assets such as good will and reputation are often critical facets of a company's success in the market. Knowing what these are and the potential value they have to offer is of paramount importance in estimating the continued success of a business.

Comparing the market price of stocks of similar companies can be of use as long as the companies that are compared are similar in size and nature.

Is the Purchase or Selling Price the Same as the Worth of a Company?

For all intents and purposes, the selling or purchase price of a company with less than $1.5 million in revenue is not the same as the worth of the company. Buyers in particular should be aware that the asking price is typically a number that is determined by what the market will bear for a company in that particular industry. It is the amount of money that the seller can reasonably expect to get when he sells his company. This is the number that most buyers and sellers are actually interested in. However, without the valuation process, there's no true way to understand the worth of the company simply through its asking price.

What Is Business Valuation?

Business valuation is the process by which you determine the value of your company in its entirety. It is an estimate of the total worth of your company at a given point in time. This type of assessment is generally required when a business is sold or purchased, but should also be done for estate planning or wealth transfer purposes. As an added benefit, the nature of the business valuation process can often identify and emphasize true profit centers.

A business valuation is critical if the company is to obtain a fair market price when sold. In turn, the individual buying a small business can be assured that the company is in a strong position to succeed in the current market.

The Importance of Business Valuation

As a potential seller, you might be wondering why you should concern yourself with business valuation. After all, it is hard enough to spend countless hours running the business while trying to keep up with day-to-day challenges. However, taking advantage of the business valuation process is one of the best methods for ensuring that your business not only survives but also that it prospers and grows beyond its current scope.

In fact, business valuation should be critical for your company since it has the potential to pinpoint its most profitable operations, while also creating a firm basis to determine the value of the company should you decide to sell. Not only does this allow you to maximize your profitability now, but also, it allows you to receive maximum compensation for your company when the time comes to sell.

Since a business valuation can be used to promote a company's growth and financial prosperity, a company that has spreadsheets and documentation to show that they have completed this process can be more attractive to a buyer, as long as the company has historically performed well.

Two main factors that are taken into consideration when determining the value of a company are the availability of the assets and the amount of money or revenue that the business can generate. Additionally, the demand for companies of the same type can either increase or decrease the value of a specific company. If the need to sell is immediate, the value of the business drops considerably. If the need to sell is minimal and no similar companies are up for sale, the value of the business increases considerably.

Business valuation analysis can assist owners in understanding the value of their companies so that they can plan for a successful financial future including any subsequent sale of the company. Additionally, a look at a company's valuation spreadsheet can assist potential buyers in making their decision to purchase or not to purchase a business.

Valuation Multiples

Strictly from the buyer's perspective, it is possible to complete a thumbnail valuation on a business with viable and current operations. To do this, multiply the company's EBITDA (Earnings before interest, taxes, depreciation & amortization) by a current industry valuation multiple to arrive at a thumbnail valuation. Note that the average multiple across industries is 4, so multiplying 4 x EBITDA would yield an average target value. Obviously, this multiple could change dramatically depending on what premiums the company presents the buyer. This number should also be adjusted by examining the company's sales and balance sheet with added-back depreciation to approximate an expected business value. 

To bring consensus between buyer and seller a formal equity valuation should be completed by a competent professional.