1. How to Value a Small Business
Posted on March 16, 2012 by Maya Pillai
Whether you are buying or selling a small business, you need to know it’s worth. If you are a
small business owner, before trying to sell the business, you need to get it appraised by a good
financial team. Similarly, if you are planning to buy an existing small business, you need to get
that business appraised as well. Otherwise you would end up paying more than its worth.
Determining the value of a small business can be a challenging task, but it is worth the effort. We
have put together a few points which will be helpful when you are buying or selling a small
business.
Hire a business attorney – An experienced attorney would be able to appraise the business
which you plan to buy or sell. He would know the right questions to ask and formulas to use to
arrive at a fair value, which will not hurt both the parties.
Review the profits of the previous years – Whether you are a seller or buyer, you should review
the revenue reports of the business. This is a great way to find out if the business was running
on a loss or profit. Hire an experienced accountant to get the job done.
Check out the average selling price of similar business in your area – You should be aware of
the selling price and revenues of similar small businesses. This will help you calculate the profit
the business is likely to make.
© 2012 Apptivo Inc. All rights reserved

2. Examine the revenue of the business – As a buyer you should analyze the growth of the
business carefully before making your decision. If the revue does not show a steady growth to
signify a positive standing, then you should think twice before buying the business. Otherwise, if
you think you have a strong business strategic plan that will turn things around, go ahead and
purchase the business but at a lower price.
Hire an experienced external appraiser – Whether you are a seller or buyer, it is always better
to hire a reputed appraiser. Look for someone who has had experience in your area to give you
a valuable opinion of the business and the true value of the business.
Commonly Used Business Valuation Methods
Asset Valuation- This method is used to calculate the value of all the assets of the business you
are planning to buy or sell. Asset valuation is more appropriate for companies with large
tangible assets. The value is calculated by calculating the net realizable value of all assets.
Entry Cost - The value of the business is calculated based on the cost to start a similar business
to that being sold. Here you have to include the cost of not only hiring and training, but also the
cost of developing a customer base, purchasing assets and developing the products/services.
Multiple Income – This procedure is followed by those businesses with an established financial
history. The price divided by earnings (P/E ratio) represents the value of the business divided by
its post tax profits. Since it is not easy to decide what P/E ratio to use, experienced and reputed
business advisors usually suggest a valuation of between 5 and 10 times the annual post-tax
profit. This method of valuation has many limitations while evaluating a small business.
© 2012 Apptivo Inc. All rights reserved

3. The other factors that you need to take into consideration while evaluating a business is its
intangible assets such as goodwill, brand, reputation, the key employees and the quality
client/customer base.
When a business owner decides to sell his business, he is likely to quote a larger figure than the
conventional industry price. He puts a charge for his years of hard work and time spent.
Therefore, as a buyer you should always consult a reputed accountant or business advisor before
buying an existing business.
Flickr image by Diana Parkhouse
© 2012 Apptivo Inc. All rights reserved