Is there a 'standard formula' for how much to pay for a small business?

Question

If you were to buy an existing, profitable small business, how do you figure out how much it is worth, assuming minimal equipment?

Answer 1

First of all, make sure their books are up to date. Take a look at their most recent financial statements, both Income Statement and Balance Sheet.

On the Balance Sheet, look at the Equity line. This is their total assets less their total liabilities. This is a good start as to how much their business is worth as it is.

Another thing you would want to consider is future profits. If they are making an average of $100K a year, for example, you would want to find the present value of the anticipated future string of profits and add that to the equity in the business. This should give you a good idea as to what price you should pay for the business.

Also, many small business run on goodwill as well. If their books have alot of goodwill on it, be careful, their customers may not be as loyal to you depening on the style of business. (Like a law office or accountant)

That's a start, but there are section of accounting courses devoted to business organization, so don't think this is everything you need to know, just scratching the surface.

Answer 2

You have no idea how hard this question is! There are about literally 20 formulas the IRS has to calculate the value of a small business. When there isn't much in the way of assets, you're basically trying to value the business as a "going concern", which will involve projecting a future revenue stream for several years-not the easiest task in the world.

I would strongly recommend finding an accountant who has a good deal of experience in this area. Valuing a business is tricky, to say the least.

Good luck!

Answer 3

A total of all assets should give you a ball park figure