The value of a business for sale is determined by a compilation of factors, such as the company’s sales, earnings, performance, market outlook, personnel, net book value and fair market replacement value of equivalent operating assets. It can also be influenced by intangible assets like the company’s image, reputation and goodwill.
Understanding the differences between various standards of value (below) can help you interpret their relative worth.
Different Standards in Determining the Value of a Business for Sale:
Book Value is not standard of value at all. It is an accounting term for the total net assets minus total liabilities on the balance sheet. Intangible assets are usually excluded from book value.
Fair Market Value is defined as the price at which the business for sale would change hands between a willing buyer and seller when the former is not under any compulsion to buy, the latter is not under any compulsion to sell and both parties have reasonable knowledge of relevant facts. Fair market value is used for federal and state tax matters, including gift, estate, income and inheritance taxes.
Liquidation Value is derived from the piecemeal sale of assets. The sale can be orderly or forced, which can affect the value. This value is typically at the low end of the value spectrum.
Intrinsic Value (also called fundamental value) is an analytical judgment of value based on the perceived characteristics inherent in the business for sale, without regard to the identity or characteristics of a particular acquirer. It represents the “true” or “real” value of an asset.
Investment Value is the value to a particular acquirer considering his or hers specific personal circumstances, knowledge of the transaction and potential synergies it will create. Investment value can be higher or lower than fair market value.
Invested Capital Value/Enterprise Value is the fair market value of 100% of the equity, plus the market value of long-term debt.
Equity Value is the market value of all the assets of a business, including intangible assets, less liabilities.
Minority Value is the value reflecting an ownership position of less than 50% of the business for sale, or an inability to make final decisions concerning the business. A 50% owner may have negative control since he or she is in a position to stop actions by the other owners.
Non-controlling Value is the value of a non-voting interest, such as limited partnership interests or non-voting stock.
Control Value is the additional value inherent in a majority or otherwise controlling interest reflecting the power of control over the business.
Factors that Affect the Value of a Business for Sale
There are many factors that affect the value of a business for sale – including financial statements, historical performance, management, and appearance. The non-financial information may be as important as the financials, so understanding the company’s operations, ownership structure, products and services, markets and marketing, and employees helps determine a company’s financial health or its future.
- Comparability to other businesses when using the market approach or in comparison to industry composite data.
- Legal rights and/or restrictions.
- Considerations such as control, minority interest discounts, or swing vote issues.
Products and Services
- Comparison to other guideline companies.
- Alternative products are available in the marketplace to assess the future success of the company’s product.
- Is the company dependent on only one product?
- Can the business for sale add similar or complimenting products in the future?
Markets and Marketing
- Do the company’s customers buy from the company because of price or because they have established a reputation of excellent service?
- How will alternative products in the market affect the company?
- The company’s marketing efforts (or lack of) needs to be considered, since a large, visible company in the market will frequently attract more new customers.
- To project future performance, the facility must be able to meet increased production forecasts.
- Does the business for sale own or lease the facility it is currently in?
- The length of the lease, and if the rent will be increased after the renewal, have to be incorporated in the forecasts.
- If the company owns the real estate and improvements, does it pay rent, and if so is it fair market?
- Maintenance costs, and replacement of equipment, are important for projections.
- Older equipment and/or non-maintained equipment mean lower capacity, high maintenance costs and unexpected replacement costs.
- Older equipment may mean difficulty in getting parts and service.
- Is newer technology available and being used by the company’s competition?
- Will key personnel and managers be able to handle the increase in the projections, or will additional personnel be required – and if so, what will be the salaries?
- What is the average age of the key employees?
- Are the employees young and aggressive, or waiting to retire?
- What is the risk in replacing the owner.
- Do the managers really run the business for sale, or is all run by the owner?
- Does new business come from the sales department, or is all of the business secured by the owner and his or her reputation?
- Too few products
- Many competitors
- High employee turnover
- Few sources of supply
- Proprietary processes
- Pending litigation
- Environmental exposure
- Over-dependence on key customers