Having a business for sale can mean a lot of things — more than people might think. How does one business value compare to a different, and how to arrive at that value? Because there are many types of businesses that exist for many various industries, it stands to reason there are numerous means of approaching the process to find the value.
There are the three main approaches to value, that are the income approach, the market strategy, and the asset approach. There are variants of these approaches, and combinations of them, and things which must be looked at because each and every business will have variations of what gives the business well worth, and some of these differences are considerable.
First we must identify the type of selling: stock sale or asset purchase.
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A stock sale is the sale of the company stock; the buyer is buying the business based upon the value of its stock, which usually represents everything in the business: earning strength, equipment, goodwill, liabilities, etc . In an asset sale, the buyer is purchasing the company assets and capital which usually enable the company to make profits, but is not necessarily assuming any liabilities with the purchase. Most small businesses for sale are sold as an “asset sale”.
Our question, when selling a business or purchasing a business, is this: what are the assets thought to arrive at an accurate value? Here we will look at some of the most common.
1 . FF plus E: This abbreviation stands for home furniture, fixtures, and equipment. These are the tangible assets used by the business to use and make money. All businesses (with a few exceptions) will have some amount of FF&E. The value of these can vary greatly, but in most cases the value is included within the value as determined by the revenue.
2 . Leaseholds: the leasehold will be the lease agreement between the owner of the property and the business that rents the property. The agreed upon leased room typically goes with the sale of the business. This can be a significant value, especially if there is an under market rate currently charged and the lessor is obligated to keep with the current terms.
3. Agreement rights: many businesses do business based on ongoing contracts, agreements with other organizations to do certain things for certain durations. There can be immense value in these agreements, and when someone buys a business she or he is buying the rights to these agreements.
4. Licenses: in certain business sales, licenses do not apply; in others, there may be no business without them. Developing contracting is one of them. So is data processing. For a buyer to buy a business, his purchase includes either buying the license to the company or the license to the individual. Often times, the buyer will require the particular access or availability of the license as a contingent element of the selling.
5. Goodwill: Goodwill is the cash flow of a business above and beyond the reasonable market return of its net real assets. In other words, whatever the business makes in excess of its identifiable assets is known as “goodwill” income, where there exists the synergy of all of the assets together. This can be tricky. Most business owners assume they have goodwill in their business, but goodwill is not always positive; there is such things as “negative” goodwill. If the company makes less than the sum total of its identifiable assets, there exists negative goodwill.