How do you value a small business?

There are lots of similar calculators or spreadsheets available.

In the end it is worth what somebody is willing to pay for it. If you aren't interested in selling it is difficult to determine that.

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Man, I had seen that but it seems extremely high. So the truth is that I was considering buying out my business partner -who adds very little to the company and is willing to be bought out- but I'd have to cut him a check for like $750k... Seems kind of unfair to pay him 10 yrs salary.

I guess businesses are like marriages: too easy to enter and too difficult (and expensive) to leave.

I suppose I could dissolve the company and start a new one.

I'll call my lawyer this afternoon but I always like checking with LRC prior to any major life decision ;)

You can hire a professional appraiser to do a business valuation. A lot of times, people doing buyouts will just agree to be bound by the appraiser's value. The alternative is to negotiate.

it's based on comps - every industry is different, so a professional appraiser can help.

for example, a family retail store might be sold based on a multiple of sales - maybe 2 x sales, while a financial practice would depend on the stickiness of clients, nature of the book of business, etc.

a pro has access to comparables and could help pretty easily.

My take, unless you think you are going to run the company better you should not buy him out. He is covering 1/2 the risk. Diversify into real estate, stocks and bonds, etc...with your extra capital.

Jabronic wrote:

Man, I had seen that but it seems extremely high. So the truth is that I was considering buying out my business partner -who adds very little to the company and is willing to be bought out- but I'd have to cut him a check for like $750k... Seems kind of unfair to pay him 10 yrs salary.

I guess businesses are like marriages: too easy to enter and too difficult (and expensive) to leave.

I suppose I could dissolve the company and start a new one.

I'll call my lawyer this afternoon but I always like checking with LRC prior to any major life decision ;)

About the crudest way to value a small business that can be found. Still comes down to what he would take for his 1/2.

If what you say is close to true, the business is worth more to you than it is to him but it is not actually worth really anything to anyone else because you are too much of why it makes money.

This means you will never get your investment back if you buy him out. Instead of dissolving it, hire a manager to do your part. If you can train a manager to do your part, then you can sell it to anyone. When you can sell it to anyone, it's value increases.

Offer him $50K and negotiate up from there.

I appreciate all of the input.

Our situation is different than most small businesses. I will try to explain.

We are a debt free company. We have no risk from a financial perspective. I am a specific kind of marketing consultant. I am the president and I own the majority of the company. I am good friends with my business partner and would like to do this in a friendly manner. i want him to be happy.

Basically, he was brought on to do Business Development, but in the end I do the pitching, proposals and contract negotiations. I do the consulting; he helps me here and there but doesn't add to the actual production (reports, white papers, phone calls). So after 4 years, I started to notice that while I love the guy, he isn't doing much more than making an initial phone call to set up a pitch. I am happy to pay someone to do that, but 30% of earnings is a bit much. Plus, I think he is bored with his position and would like to do something else. He isn't just going to walk away on his own, though. Who would?

So I have done some research over the past few months and I have a meeting with an attorney this Friday.

With our business: we have no contracted clients (many are long term, but by choice, not by contract. They could leave tomorrow), our brand is not an asset, we have no tangible assets outside of some old office furniture and our computers. Our revenue for the last calendar year was $384,725.17. So we are not tonning it by any means, but for one person that equates to roughly $200 in earnings, plus what I would make up after canceling out benefits and all the office expenses that come along with multiple people. I would downsize at first and look at building by hiring employees as opposed to having a business partner.

Thanks for those who are still reading.

You're a business consultant and you had to ask on LRC how to determine the value of a small business.

applying a multiple (of say 3x, 4x and 5x) to Owner's Discretionary Earnings is a generally accepted method of valuing small businesses ($500k to $5M in annual revenues). Sophisticated buyers of small businesses are usually most concerned with cash being spun off by the business. This methodology looks at exactly that.

I offer Informal Business valuations and Buy/Sell reviews to my clients and prospective clients.

We value it 5 different ways, Book Value, Straight Capitalization, Capitalization of Earnings, Years Purchase and Discounted Future Earnings.

I do these at least every 2 years with my business clients to determine value for business protection, buy/sell purposes and exit planning strategies.

Where are you located?

Does he have a job description?

Wtfunny wrote:

You're a business consultant and you had to ask on LRC how to determine the value of a small business.

No, I am not a business consultant.

If you have no debts, then cash in the bank, and what you can sell your business equipment less any selling costs.

Jabronic wrote:

Wtfunny wrote:

You're a business consultant and you had to ask on LRC how to determine the value of a small business.

No, I am not a business consultant.

OK .. so you're a marketing consultant and you don't know how to value a small business?

Most specialists don't actually seem to know that much about their specialty.

I'd agree with most here. There's no set way to value a business like this (unless you have a provision for this in your charter, which most have). In the end, it depends upon what someone is willing to pay.

It depends a lot on the conditions of the sale and who you're selling to.

A fair price to buy out a willing partner? A minimum would be the book value. A maximum might be something like 10 times his "profit" where I would define "profit" in this context as what he makes from the company over and above what he would be making otherwise (i.e., if he stopped working with you and took another job what would his total income be relative to what his total income is currently). 5 times profit is probably a more reasonable number. It would depend on how willing he is to sell and how motivated you are to buy.

If he owns 30% of a professional services business with $350k in annual revenue I don't see the value of his share being over $200k.