Thought you might be interested in an article How to Calculate the Selling Price for a Business and thought I’d share a few points with you here. I’ve found some relevant information here so if I find more, I’ll be sure to pass it on.
Pricing a business you own is thrilling — because it means you’re taking the next big step in your life — and also something close to terrifying, because it means you’re taking the next big step in your life and you don’t know how much money you’re going to have when you take that step.
There are all kinds of bad ways to price your business, most of them having to do with your emotions and how you feel about the business. There are also four commonly accepted ways that will help you determine the right price.
Return on Investment
This approach treats the business itself as a kind of metaphorical black box with an output. The output, is the return on investment (ROI). Let’s say, for example, you have a repair service. With this approach, it doesn’t really matter what you’re repairing — what matters is your annual net profit minus the probable salary to pay someone to do what you do. Your annual net profit is what’s left after you pay all expenses, among them taxes, rent, cost of goods and salaries. You need to deduct from that what it would cost to replace you because a buyer looking at your business as an investment needs to know what she’d have left annually after hiring your replacement.
From an investor’s point of view, this may be the most objective valuation method. One problem with it is that if you’re really great at what you do, then that accounts for a lot of your business success. A buyer looking for a return on his investment can’t assume that he can hire someone who’ll achieve similar results. This can make a small business with an excellent reputation and a charismatic owner difficult to price, because the buyer can’t count on hiring an equally outstanding manager to replace you. Sometimes, in this situation, you can get more for your business if you agree to stay on board for a few years.
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