What Is My Business Worth? 3 Easy Steps to Find Out

by Neal Frankle, CFP ®

What is my business worth? I’ve asked this question many times before. Not because I want to sell it. I have worked really hard to build this business, and it’s just nice to know how much it’s worth. If you work as hard as you do, you also deserve to know the value of your small business.

And this is smart even if you’re not planning on selling it today. Remember, if you can’t sell your business, all you really have is a job. Maybe you think you have a great small business, but what you really have is a high-paying job. There is nothing wrong with that. But if you can’t sell your business, it’s not a business. You might think that you’ll sell your business when you retire. But if you can’t sell it, it doesn’t have any value. You’ll have to save money for retirement in some other way. That’s why you need to know what your business is worth.

This post is intended to show you how to do your own small business evaluation and appraisal. Later posts will show you how to increase that value going forward. Keep in mind that you need to find out what your small business is worth to someone else who is buying an existing business. It doesn’t matter what it’s worth to you. Keep that in mind as we go through the following materials.

In the real world, many small businesses are bought and sold without paying attention to facts. Buyers try to determine how badly you need to sell and what’s going on in your personal life. They also consider the overall state of the economy in determining price. Those external considerations often impact the price of a small business far more than they should – and not to your benefit if you are the seller. If you want to get the highest price possible when you sell your small business, don’t discuss your personal life. Stick to the facts about your small business. That’s the best way to get the best price when you sell your business.

A fair way to value your business is to take your net income (after you deduct a fair salary for yourself if you work in the business), add back in any personal expenses the business picks up for you and multiply that by a standard multiplier. If the business owns property or inventory, you’d add that too. You might be selling to get business debt relief. If that describes you and you have liabilities, you’d subtract that from the value of your small business.

Let’s assume your small business doesn’t have inventory, assets or liabilities. It’s a service business. Let’s take an example. Say your business grosses $500,000 a year and the business runs $400,000 in expenses each year. But $50,000 of those expenses are for items that you’d have to pay for personally if the business didn’t pick up the tab. (I’m not encouraging you to have your business pay for personal expenses, but some people do it.) If that describes you, you have to add that $50,000 back into the net income. In other words the real business expenses are only $350,000, even though you declare $400,000 for tax purposes. So the new owner would run the business and have $150,000 in profit each year.

But wait, the new owner might not work in the business. She might hire a manager to run it. Let’s say she could do that, but she’d have to pay $60,000 to the person she hires. That being the case, the real net income of your business is probably around $90,000 each year before tax. ($150,000 profit less $60,000). This is what’s called the “free cash flow” from your business. It’s a very important number. We’ll come back to it in a bit.

1. History Lesson

Do the exercise above on your business’ income over the last three years. Run a few reports from your business budgeting software. What was the free cash flow from the past few years? Is it rising or falling? Why? If it’s going up, explain what you’ve done differently and what the new owner can do to keep that trend moving. If it’s declining, you need to explain why. And you’ll need a strong argument to convince the buyer that the decline can be reversed.

If the free cash flow is rising, you can easily ask for 10 times last year’s net returns. So, in the example above, you should be able to ask $900,000 for a business that earned $90,000 net income if that income is increasing. If the net income is declining, you’ll be lucky to get five times last year’s return. That’s because the risk is increasing and the buyer won’t like that risk. If that were your situation, you’d be lucky to get $450,000 for your shop.

2. Add-Ons

Buyers pay more for business when they perceive the risk is low. Find out as much as you can about the buyer. Does she have prior experience in the industry? Does she own other stores like yours? Does she have trained personnel lined up and ready to take over? All these assets make your position stronger because they reduce your buyer’s risk. Find out as much as you can and try to point out to the buyer how low the risk is for her in her particular situation. Is this person buying the business as a way to supplement her retirement income? Is she going to try to grow the business dramatically?

Of course, you should always be honest. If there are pending landmines, you must disclose them. If you think the person is walking into a hornet’s nest, tell her. Your karma will be better and you’ll spend less time in court if you do.

3. Market Research

The multiplier I mentioned above is a rule of thumb that varies from industry to industry. Find out what businesses like yours sell for. Check out eBay, Craigslist and other online sites that sell businesses. This is probably your best indicator.

The more you prepare yourself with facts, the better you’ll do when you sell your business. Don’t look for someone to pay you what you think your business is worth or to compensate you for all the hard work you’ve put into your business. Be honest and realistic when you are selling your business and do your homework instead.

 

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{ 96 comments… read them below or add one }

Steven Wenrich March 22, 2014 at 11:36 AM

We are in the process of doing some “exit strategy” planning (approaching retirement age). We own a professional corporation and a man agent LLC which owns the assets and pays the bills. The purpose of the management LLC is to allow a non-professional (non-physician) to purchase and own the business.
We have a net profit of approximately $650,000 per location and all of our (personal) effort is involved in building new, rather than operating existing, sites. In other words, the existing sites run themselves.
We also have developed manuals to build and operate these sites. We also have an IT infrastructure in place robust enough to manage up to 200 sites.
What would be an anticipated sales price for such a business (per operating site)?

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Neal Frankle, CFP ® March 23, 2014 at 7:54 AM

What is the multiple in your industry?

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E February 4, 2014 at 6:46 PM

Hello. I own a medical billing company that has slightly declined in sales over the past few years(about 5%), but i have also cut the cost of production by about 8%. So while my p&l shows less in gross revenue, the net has increased. If i am able to pay myself about 250k per year, what would your estimate of sale price be? Keep in mind we have been in existence for over 20 years and have never had to advertise. This business has always grown and gotten new clientele by word of mouth only. I think another person with an advertising and sales background could be more aggressive and grow the business substantially. Also, sales are around $1mil/year. Thanks for your input.

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Neal Frankle, CFP ® February 4, 2014 at 11:09 PM

Why do you think the revenue is down? What are the multiples for similar businesses?

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john adams November 14, 2013 at 3:08 PM

Dear Sirs,

Appreciate it if you could answer the following question:
If an investor buys a 20% share of my privately owned business that is worth $1,000,000, does the $200,000 investment have to be kept in the company or is the money invested now mine?
Thank you

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Neal Frankle, CFP ® November 16, 2013 at 12:32 PM

John, before you do anything, consult your attorney. Having said that, if you owned 100% of the company and sold 20% of your personal assets for cash, the money is yours. However, if the corporation sold the shares from treasury stock, the money belongs to the company. Who sold the shares?

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Brian July 26, 2013 at 10:46 PM

Hi Neal. I’m back. I got a question for you about showing prospective buyers the books. I have not been great about my books since I launched 3 years ago. There has been lots of co-mingling going on with my personal expenses (grocery, travel, dinners, dogfood, etc). I started a new corporation 3 months ago so I could start fresh (closed the old one). My tax returns show a different picture because they are showing these personal expenses as business expenses which is lowering the profit. My question for you is how do I explain this to the prospective buyer without lowering the value of my business? The good thing about my business is that its pretty straightforward to understand. All our sales come through a merchant account so revenue is clear. Also there are not too many different expenses involved in running this business. What should I do?

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Kristy June 24, 2013 at 1:06 PM

Hi Neal,

I own a spray tanning business in Southern California that I created in 2007. The business is virtually zero overhead, as the product, and equipment required to run the business is less than 500 bucks. That said, I have grown the business 50% year after year for the last 4 years, generating a gross annual revenue of 60k and growing. My husband and I want to move out of state, and cannot take our clientele with us, thus the reason for wanting to sell the business. Not to mention, it would help us start up the same type of business in the new location we are entertaining to move to. What would be the best way to solicit the sale, and what would you think the business would be worth. One thing to keep in mind with this type of business, the clientele is unlikely to change services, as they become very comfortable with the person who is tanning them in a private way, meaning, once they find a person they can tan with minimal clothing, they are more than likely not going to find another service to tan them. The rate we charge is the lowest in the area, so there is room to grow in a few ways. We are in the process of revamping our website, that will offer products, and franchise opportunities. Depending on the Franchise complexity, we may take that venture with us were we relocate. Thoughts? thank you in advance for your time and consideration.

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Neal Frankle June 28, 2013 at 6:57 PM

Kristy….what is your specific question please?

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Buddy June 21, 2013 at 1:33 AM

I own a growing condiment (sauces, seasonings, etc.) business that I want to sell 50% of the stock. In 2012 gross sales were 225,000 which grew about 3 to 5 percent from 2010 and 2011. This year to date 06/20/13 sales are already around 130,000.00 and I expect gross sales for this year to be around 250,000.00, a gain of 11% in sales. Part of the larger growth this year is due to a new sauce I created for a local radio station which promotes there sauce and my company almost daily. I estimate a profit margin of 44 to 54 percent this year of gross sales, which I think is realistic. I have a family member interested in the stock and my largest wholesale distributor is interested as well (they account for about 25% of my sales). There is no real estate involved just my trademark, recipe’s and customer list. My question is what would be a fair price to ask? I think the company has potential to grow even more in the next 12 to 18 months, but that is just my gut feeling. Even though we have been in a recession for the past 6 years it hasn’t hurt the growth of my business. Something about food, if someone likes it well enough they are going to buy it. I know I do. Thanks in advance for a fair price for both sides or any other advice…..all the best to you, Buddy.

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Neal Frankle June 21, 2013 at 10:52 PM

Buddy, I wish I could provide you with the information you need but it is far beyond the scope of a reply. Have you hired a business consultant? What do you think the company is worth and why?

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Buddy June 22, 2013 at 12:59 AM

I think it is worth no less than 300,000. because it has been growing without any promotions, advertising (except for the past 4 months or so from the local radio station). The business is cut and dry….no real employee’s since the product is now farmed out to another manufacturer and shipped directly to the customer.
Before this we produced the sauces by hand and a lot of labor was involved, but that isn’t the situation today. So, I thought with profits of roughly 100,000. (which I think is conservative) a partner would gain 50,000 in assets a year for doing little of nothing except building the business stronger and more gains would be created. Therefore they would own 50% of the business and have there investment back in 3 to 4 years. But the business I think will grow a lot faster with an aggressive partner and he/she could have there investment back within 2 to 3 years.
My major was in music and never ever thought I would be selling hot sauces, bbq sauces, seasonings and rubs. It started as a hobby and has grown into a very profitable business and I have really enjoyed people that say its the best sauce they have ever had; basically my product moved from just mouth to mouth, and Gator Hammock now is very known throughout Florida, but you probably have never heard of our original and most popular product, Gator Sauce; which is now Hot Shots best selling sauce (a condiment distributor in North Carolina). But if you have any desire I would be more than happy to send samples for you, your friends and family to taste over our Independence Day Holiday. I could ship them out by Tuesday and you will have them before the 4th. Thanks again for your input. Buddy Taylor….. creator of Gator Hammock sauces and seasonings. By the way I am not trying to plug my business on your site, feel free to delete the names. But I would love for you to try them……Hope you have a fantastic and safe 4th of July.

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K Myers May 22, 2013 at 1:38 PM

Hi I feel that you are the guy to ask. I live in the UK, my husband and I have a great successful business in Ophthalmic Instruments. Our end of year sales after tax is approx in dollars $7,800,000 (seven million and eight hundred thousand dollars) we have the highest amount of sales in the UK in the ophthalmic market, we also sell world wide. Unfortunately my husband and I are divorcing after 17 years of marriage and have one daughter. Can you please tell me how much our business will be worth. It has trebled in sales in seventeen years, since I started the business is thirty seven years old, and the end of years sales was only $2,336,000. My husband and I were away on numerous occassions between 3 – 4 weeks and the business ran by itself, we have (including ourselves) 20 staff.

Hope you can help me.
Best Regards
K Myers

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Neal Frankle May 22, 2013 at 4:08 PM

First, I am sorry that you and your husband are divorcing. On the other hand, congratulations on having such a wonderful business.

It’s difficult to say what your business is worth at this point. What is your net income? What has been happening to your net income (from the business) over the last several years? What is happening to the industry? Is it growing or shrinking? What does the competition look like over the next several years?

This information will help me guide you further. Thanks!

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Susan May 9, 2013 at 6:15 PM

We are growing about $10,000 – $20,000 a year. We write everything so it shows a loss. There isn’t any other jump castle businesses to compare it to because the smaller ones go out of business and sell their inflatables. Most successful jump castle companies stay in business.

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Susan May 8, 2013 at 5:23 PM

Neal,
My husband and I own a successful jump castle company. We gross around $140,000 and we keep growing every year. We have 40 inflatables and 9 trailers. We have a many clients including churches, businesses, and schools. We are also teachers and want to slow our life down a bit. How do we determine the value of our business? We aren’t rushed to sell but we are starting to talk about it.

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Neal Frankle May 8, 2013 at 10:29 PM

Susan, what is your net income? How has it changed over the last several years? What are similar businesses selling for? Thanks. Neal

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Doreen April 9, 2013 at 6:54 PM

Neal, forgive me, but I’m quite confused. In doing some research, I have always read that a general rule of thumb for selling a business is 2-3 times net profit. In using that example, the biz you used as an example with net profits of $90,000 can be expected to sell for $180,00-270,000. The $900,000 figure seems quite high as a potential buyer could not realistically expect to turn a profit for many years.

We own a residential cleaning business with average net profits over the last three years of $192,000. We have recently listed it for $520,000. Based on your example, our asking price should be more than 1.5 mil!

I have googled ‘how to sell a residential cleaning biz’ without too much success. Also, I’m a little gun shy about dealing with biz brokers at this time, but would like to know the best way to find an appraiser for the biz. Thanks so much!!

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Neal Frankle April 9, 2013 at 10:19 PM

Doreen, This is a function of industry. In my industry, the going rate is 2 or 3 times GROSS – not net. This is absolutely a function of the business you are in and there are no rules of thumb that are helpful in my opinion. I am interviewing a number of people so that I can recommend someone to do the appraisal but I am still searching. Why are you hesitant to speak with a biz broker?

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Doreen April 10, 2013 at 4:19 AM

Wow, that’s a huge difference depending on industry! Why is there such a discrepancy?

I am not adamantly opposed to using a broker, and in fact may consider it in the near future. I’m just thinking we should at least try to find a buyer on our own to hopefully save any finders fee, although I think that may prove challenging. Our business is a franchise, and most buyers of the businesses that have sold are found thru a broker that works with the franchise directly.

We have an ad in Craigslist which thus far has had one response from,you guessed it, a broker! We may try bizbuysell next. Any other suggestions are welcome, and thank you so much for your help!

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Julia May 8, 2014 at 9:17 AM

Doreen,
Were you able to find a private buyer? I also have a cleaning services and want to sell. I currently have a broker working on some number for us. Last year in November, she gave me some numbers but we were not satisfied. Now with the 2013 tax year over and the 1st quarter of 2014, we are hoping for higher value. Like you, I would like to save on the broker fees and sell myself.

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Cross March 16, 2013 at 1:51 PM

Last week I was approached by a hospital to consider selling my two sleep laboratories. With insurance reimbursements going lower by the year, I am seriously considering it. My question is this, I pay doctors to read my reports about 28 percent of gross. If this hospital purchases my labs, they will get that 28percent bc they are medical doctors and I am not. Should I estimate my ask based on my personal income, or mine, plus the 28 percent I pay the doctors. Oh plus 6 percent for medical billing they would do “in-house”. Any help would be appreciated. My next formal meeting with them is April 16th. Thanks so much for any feedback!

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Neal Frankle March 16, 2013 at 9:19 PM

Cross, I’d look at the value of your company from the buyer’s point of view. That will also increase the price…sweet!

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Andrew March 14, 2013 at 10:26 PM

Neal
I currently own 2 cell phone repair shops and have been neting a profit at 120k and increasing at 10-15% over 3 years and was ask to sell a location to someone and was wondering what you think it would be worth asking? Thanks in advance for you great expertise.

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Neal Frankle March 15, 2013 at 6:18 AM

Congrats Andrew for having a growing business.

Why are you interested in selling? What are other shops going for? Did you buy the shops 3 years ago? What price? Based on what?

The answers will help me give you a better direction. Thanks. Neal

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Andrew March 16, 2013 at 9:42 PM

Neal
I’ve grown my business from scratch and I just have a guy that wants to buy a location and haven’t seen others sell but I’m doing for capital and in starting stages of opening a training center for cellular tablet and game system repairs.So was seeing with my sales and gross and net what you would ask?

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Andrew April 6, 2013 at 9:16 PM

Neal
Can you reply and let me know what you think?
Thanks in advance

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Andrew June 21, 2013 at 11:14 PM

Neal did you forget my question haha Please help me!!! I’ll retouch I own 3 cell phone stores and clear and made 80k the first year 120k the second year. I was wondering what to ask for my cell phone sales and repair business If I wanted to sell just a little FYI I am at 85k profit right now since Jan 1st.
Thanks

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Buddy June 22, 2013 at 1:06 AM

Very impressive Andrew, hat’s off to you and I hope it continues, love hearing successful stories in the USA and abroad as well….Buddy

Irene Miller March 13, 2013 at 6:32 PM

We have a bakery in Lynchburg, VA.The original owner and his wife ran a thriving, prosperous business, that was known far and wide, for nearly 50 years, selling it in ’05. By Aug. of 2010 the business had gone through three different owners, finally closing down altogether. Needless to say, the name was badly tarnished in the mean-time.
We had a wholesale baking business of our own in a near-by town, and badly needed a bigger facility, so when we heard the building was available, we decided to go retail and re-open that bakery. Although we kept our own name and recipes,just the fact that we were in that building gave people an expectation, good and bad both.
We had an incredibly intense first year, as we learned the retail ropes, and worked really hard at restoring the name. We not only have done that, but the name is gaining elite status in Lynchburg again. That first year, we grossed $150,000 with $20,000 take-home pay. The four months over our first year, which is all we can track by, shows a 25% increase in sales, and we appear to be ready to roll. The bakery has enormous potential, with enough space to add a sandwich shop or an ice cream parlor or both. Currently we are a Bakery/ Cake shop/ Donut shop.
The reason we’re selling is that because of various personal reasons, we have decided to move out- of -state. After all the hard work it seems to be too bad to leave it now, never-the-less, it seems the best move for our family.
It’s been a family run business for the most part, with part-time help over the Holidays. One employee stayed on and is taking over a management position. She would like to stay on with who-ever buys the bakery.
Do you have a way to come up with a reasonable sale price , considering the fact that the business has not yet generated any free cash flow.
We are renting the building and most of the equipment. We have approx. $5,000 in small equipment , inventory, and etc.

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Neal Frankle March 13, 2013 at 7:08 PM

This is an involved question. I can’t really respond here in a way that does your question justice. Without any cash flow, you really have a job and not a business. I know that sounds harsh but that is the reality.

What did you pay for it?

What has occurred since you bought it?

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Brian March 11, 2013 at 12:45 AM

Thanks Neal! I’ve got a question for you. I’ve been rereading the post about valuing your business and would some additional clarity on assessing a value on the business of 9x of net. It just seems high to me.

I looked through bizbuysell and other business listing sites and most of the businesses showing a profit appear to be going for at most 3X of net. For example this business I found looks to making good money, but the asking price is only 2x of cash flow. Assuming owner is working and manager needs to be hired, the net may be around 50K less which would still make the asking only 3X times net.

Is there a different way to assess the value based on net depending on the type of business being sold? Does a growing restaurant use the same valuation formula as a growing service business? How does that work?

Thanks!

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Neal Frankle March 11, 2013 at 7:00 PM

I guessed your business value at 2 to 3 x gross….this is standard in many service industries but this is why I suggested you speak with a specialist.

a. It may not be the multiple for your industry
b. Your growth has to have some value as well.

I have no idea as to how a restaurant vs a service company is valued. I believe it is very specific to the industry, what’s behind the growth and the business risks.

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Brian March 10, 2013 at 10:22 PM

Thanks Neal! Would you say the business broker selling the business would qualify as the appraiser or does it make sense to have a separate appraiser value it (since they are neutral in the transaction)? Also, do you have a blog post discussing how to go about find a good business broker or if one is even necessary in this day and age of the internet?

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Neal Frankle March 11, 2013 at 12:05 AM

No way Brain. The business broker isn’t objective. It’s worth the money to get a third-party appraisal – especially if you are talking about serious money. I don’t have a post on finding a business broker…but I’ll look at that as a possible post! Thanks…

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Neal Frankle March 10, 2013 at 8:02 PM

Assuming you don’t have equipment/assets, I’d say anywhere between $600k to $900k but I’d hire a professional appraiser before I put it on the market.

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Brian March 10, 2013 at 6:41 PM

Thanks Neal. If I hire a manager, I make money but I’ve got nothing to do but collect checks. Not enough money in the bank to build another new business.

Risk to the business is this: Its an easy business to duplicate if someone has enough capital. Also, competitors could bring down the price some which would force us to do the same, thus hurting our margins. I don’t expect it will be long before someone does duplicate in my area (been duplicated in other parts of the country). Right now we have awesome reviews because customer love our product/service and are blown away by our customer service.

If the customer service slips, I could see a competitor taking some of our market share.

I would rather sell the business while its growing and has a decent profit to make it look appealing. However, once it has 300K of revenue, a new owner could hire a manager, be hands off, and still net 100K. How much is that worth?

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Brian March 8, 2013 at 12:32 AM

Hi Neal,

I have a simple eco-friendly consumer business in the West coast where customer order a service on our website. Its an innovative new business, highly rated, and growing. Its been in business for 2 years and the sales have been increasing every single month. While the overall sales are not high, the profit margins are good once we hit higher gross sales. In 2011, we did about 70K in sales, 2012 was 120K, and I expect 2013 to be over 200K. Currently we have 1 FT and 2 PT. We have fixed costs of about $1500 per month (rent, utilities, etc). Labor cost is about 20% of revenue. Fuel is about 10% of revenue. I estimate once we do 300K in sales.

Why am I considering selling you ask? I’m kind of bored of it and exploring selling it. Any ideas of how I can price this? Also, I’ve heard easy to run businesses like gas stations and convenience stores have high sales multiples. Is that true? My business is not a gas station or store, but its a very simple service with a reusable product in a large consumer market.

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Neal Frankle March 10, 2013 at 11:20 AM

What is your net? What has your net been over the last 3 years? How much would it cost to hire a manager so you don’t have to be involved? If you did that, what would happen to your net? (please answer in % not dollars)

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Brian March 10, 2013 at 2:00 PM

1st year net: 0%
2nd Year: 30% net
3rd Year: 50% net (estimated based on 200K in revenue)
4th Year: 50% net (estimated based on 300K in revenue)

A manager I could trust is about 50K/year.
If I hired this manager:
3rd year net is: 25% (estimated)
4th year net is: 33% (estimated)

What do you think?

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Neal Frankle March 10, 2013 at 6:31 PM

I think in your shoes I’d hire a manager and cash those checks. The only question that still lingers is what the risk is to your business? What might put your out of business over the next 5 years?

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Spidee February 26, 2013 at 5:11 AM

I own a successful services website in the UK. We are a band name in our sector and rank #1 for thousands of phrases in our market sector globally. We receive 10-15000 visitors to our site each month it has risen for 50 a week since 2008. We take 1 million and rising inquiries for our services each year, We convert those inquiries into around 200-225K in sales. We pass all our work out to a supplier who we pay 80-100K per annul. The supplier now wants to buy the company and our site. We have one member of staff who takes phone inquiries and carries out all duties such as packing up work and sending out. Our supplier can easily take over the business and we feel that with more technical knowledge of the trade their GEo location for walk in customers, better pricing strategy, more staff to respond to the huge inquires that they can easily build the business in a multi million turnover, and increase profits dramatically. They have made a proposition whereby they pay for the business from revenue over a 3-5 year period. How can i come up with a sensible value for this business in this scenario? many thanks!

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Neal Frankle February 26, 2013 at 5:49 AM

Why not partner with them instead? If you sell based on net revenue, you’ll be giving it away. It sounds like:
a. you are growing fast
b. the new “partner” could fuel that growth

Tap into that growth because that is where the value is.

If you do decide to sell, I would not recommend doing so over a 3 to 5 year period because you aren’t really getting anything in return – the business is buying itself for the buyers!

In terms of drilling down to a price, again, you are going to need either a consultant or find out what similar businesses are going for. For the amount of money involved, if you still want to sell, I’d hire somebody. It doesn’t cost much and well worth it.

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Spidee February 26, 2013 at 6:05 AM

Hi Neal. Thanks for your speedy response. In our original talks we proposed that we somehow merge our business with theirs. They handle the workload – We focus on branding market. And we share the profit somehow. But they have been in talks and now want to buy. And from our original proposals I can see why. For us to protect our IP we would need them to re-brand their business and offer some trading guarantees. Otherwise our business could be driven to the ground.

My partner wants to free up time and wants to move away from the business. I too have other projects and we both would like to just lock in the revenue stream. I also feel the business has done very well and I know it provides a well needed service. I think that our lack of interest and wish to develop it (open our own factory) is strangling it’s growth. I also see that in our supplier buys us out it will grow into a fantastic business for them and make a better one for the public. Their is a sense of achievement in making that happen.
My partner and I were thinking along of the lines of: If we could lock it a return each month (that would nearly match what we get) close a deal and let them take it over – it would tick a lot of boxes.
This might seem like bad business. I don’t know.
Who can or where can i find someone to help me make the right decisions and maximize the best deal from what is on offer.
Do you have any more advice to give?
Thanks

Spidee

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Thomas February 25, 2013 at 10:03 PM

Neal,
I own small courier company hat I have been running for several years. I expect to gross approximately $60,000-$80,000 this year. I have one full time employee, and several part-time employees (well, I.C’s actually, commission based on deliveries). As I do some of the deliveries myself, as well as answering the phone and all all office work… and I have kept fixed operating costs very low… I do okay. However, if I did no deliveries myself and I hired someone to handle the phone and office work, I would net very little. Does this mean that my business has no value?

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Neal Frankle February 26, 2013 at 5:52 AM

Thomas, It has a lot of value to you on many different levels. But what you have is a job really. You still may be able to sell it to someone who wants what you have – freedom and self-determination. But unless you could hire someone to do the work and still make a profit, the number of buyers are limited and that reduces the price.

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Susan February 25, 2013 at 7:19 AM

Hi Neal,
Where would I find the multiplier for my business. I own a non asset based freight brokerage, in business for 13 years. Also, looking at the exercise above, should payroll be counted in the expenses?
Thanks

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Neal Frankle February 26, 2013 at 5:43 AM

Susan, I would just Google it to see if you can find the multiplier. I would absolutely count payroll as an expense.

I am going to be writing a follow-up to my article on “what is my business worth” shortly to provide more info. Stay tuned….

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Tim February 15, 2013 at 6:09 PM

Hi Neal,

I have a small business (debt settlement) that grosses about $350K per year. After expenses, payroll (including $52K salary to myself), it nets approx $90K in profit. It has consistently grosses $350-400K per year for the past 5 years with my salary $52K and typically $75k-$90K in profit–very steady. I’ve been in talks with a similar company to purchase my company. Before I show them the books, I would like your thoughts on what is fair/acceptable for me to sell or at least an idea of what I should expect. Thanks very much as I appreciate your assistance and input.

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Neal Frankle February 17, 2013 at 8:59 AM

Tim,

I don’t know much about the specifics of your industry. I think a good tactic would be to let them throw out the first number and justify it. Then, come back with what they say and let’s discuss further. Other than that, it’s important to do some research on your industry.

Are your profit margins in line or stronger/weaker than other firms?
Is your growth tracking with the industry?
What is your competitive edge? Does your firm depend on on you or do you have strong systems in place?

All these issues define your value.

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America February 12, 2013 at 11:50 AM

Hello Neal,

I have a small manufacturer business. I have a concern ,if what I am doing it is well or no. I make in gross sales last year $230k and I paid to my self $23k. This year I make $302k and I paid to myself $45k . I started my business in 2008. My concern is . Is this a good grow for a manufacturer in 4 years of business? If I want to sell the business how much could I ask for? I have around $80k in equipment and $10k in inventory. I am very disappointed of what am doing. I was expecting make more money.hopefully, you can help me.

Thanks

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Neal Frankle February 13, 2013 at 6:16 AM

America,

Do you think the growth will continue at 50% a year? That’s an amazing increase – oh…and by the way, your net doubled. So you have a great business if this keeps up. The problem may be that you started out slow and only now things are turning around. What are the prospects for the future?

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Todd February 10, 2013 at 5:19 PM

Neil, I am a manufacturer and manufacture a marine product, our sales where around $100K for 6 months with profits of $70K, Just starting this week on the marketing, these sales where off of our web page and ebay. I have been persued by a larger player to buy the trademark and assets, I will still manufacture with a 20% profit built in and exsclusivly sell to them, they want a 5 year non compete also. I will sell to them for $70 and they will sell to the big box $150.00 and the big box will retail at $250.00 . I am guessing the volumes with there juice will be 5000 units per year. I will need to grow to meet demand, that will take my time and also a $50K investment. What price for the assets and should I ask for a salery for 2 years to get the project flowing for the next 2 years. I have 3500 hours and $50K in injection molds I had built to make product.

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Neal Frankle February 10, 2013 at 6:04 PM

Todd..in order for me to give you a worthwhile response, I’d need a lot more information. If you’d like to consult off line, please let me know.

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Tony February 1, 2013 at 7:25 AM

Hello Neal, Seems like your the man to ask. I am a owner of a medical marjuana business here in CO. I have a couple people that want to invest. They want to come in as two seperate partners and buy 33.33% each. Making them together a majority holder at 66.67%. I grossed over $320 and netted a little over $210. I know this is a high risk business but it is also a booming business and has endless potential. I feel the high risk factor isnt there anymore, being in the business for 4 years now. These newbs from another state are really serious buyers. Ive been talking with them on and off for two years. Well to make a long story short, they came to me with plans and goals and a LOW Ball offer for 66.67% of shares(i dont want to lose majority but..). They low balled because they feel there is a huge risk factor. Which there is in a way, I deal with medical marijuana but there are no real problems in our state gov; we are passed the problem stages. I mean Colorado legalized it.. That to me isnt a high risk, its about to go BOOM. I know there are a lot of factors that take place but isnt my business still worth a min of 2-4 times net or more considering the nature of the business? Its only worth what some one will pay, I know. They want me to work the business still and expand it to all of my knowledge but thier low ball offer doesnt make me comfortable to get the things done or to bring it to the next level. I have not counter offered yet. Should I stick to my guns and get what I feel is fair or does that not even matter? Thank you for any input you might have.
Tony

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Neal Frankle February 3, 2013 at 11:03 AM

Why do you want to sell? What is their offer? How are they justifying it? What would you do with the money if you sell? Seems like you have a profitable business and unless you want to reduce your risks, why not hold on to all of it?

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Marcy January 30, 2013 at 7:11 PM

Hi Neil I have a printing and copy shop for 25years have been approached and don’t know what to ask read all comments you suggest we gross between 230k and 299k on a good year made some great profits however industry changed and Internet has cut into net about 47k also insurance and car completely paid from business please advise have a meeting on fri am thanks

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Neal Frankle January 31, 2013 at 5:36 PM

In your shoes I’d ask the buyer to name a price and then ask them to justify it. In negotiations, the person who throws the first number always loses. Look at the multiples for your industry. Have you done that leg work?

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rycall January 29, 2013 at 8:43 PM

Hi. I currently do 1.1 mil in sales. Net income is about $32k. As a company we have four empoyees including myself with all gaurunteed salaries of $175K a year. Inventory and assets always at about $250K. Been in business for 20 years in same location and not moving. What would you evauluate the business if I would sell it. Thanks in advance.

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Neal Frankle January 30, 2013 at 6:39 AM

Rycall What has been happening to sales and net income over the last 5 years? What do you expect going forward? Why? Do you own the building?

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rycall January 31, 2013 at 4:34 PM

Thanks for the response Neal. The sales and income are about the same every year with slight 2% increase. I expect at least 1.1 in sales every year with about the same result. We pride ourselvesn customer service and having what the customer needs always. I do not own the building. I am in a Mall

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Peter Newman January 23, 2013 at 7:02 AM

I am 66 years of age and want to retire and sell my international phone card business which is run from home so no staff and overheads.
Turnover for last year $407,000 and a profit of $128,000 this business could quite easily be run from any where in the world with internet access.
What price would you suggest I begin negotiations at.

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Neal Frankle January 23, 2013 at 5:44 PM

Peter, what is the standard in your industry? What has been happening to sales/profits over the last 3 years? What are your expectations for the future? My industry buys/sells businesses for 3 x gross or 8 to 10 times net.

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Joy January 18, 2013 at 11:49 AM

I’ve been approached by someone who is interested in buying my rental cottage and and wants to continue renting while he is not using it personally. I’ve estimated a value of all the furniture, equipment and supplies that would go with the cottage, and I have a value established for the real estate. Nearly 100% of my customers come from my Internet presence on free and paid vacation rental websites, as well as the high ranking on search engines of my own website. How do I establish the value of my web presence to add to the real estate and personal property values? Should the value of upcoming reservations on the books be added to the sales price? Thank you.

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Neal Frankle January 19, 2013 at 4:53 PM

Joy, you have a rental business. What is the net income? How has revenue/net income changed over the years? This data must be included in your valuation. You own much more than just a piece of real estate. You own a business. The real estate value is added to the business value.

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Paul January 17, 2013 at 7:15 PM

My father began the family business and my brother and i worked there for years, i discovered two years ago he had set my brother up with a “secret bonus” system to pay him for work i was doing. (I was in sales and worked on commission, and discovered many new methods of streamlining and increasing productivity) I took a look at the books and found that the company was losing about 10% per year. Our gross income was about 450K.We lost money for 3 years. (30k, 30k, and 50 k) I walked away, dad went in the Nursing home and the business suddenly made 10%. Like my dad before him Brother began keeping the books from me although I m a member of the Board of directors. What records to I need to ask for to determine the worth of the business?.

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Neal Frankle January 18, 2013 at 6:53 AM

Paul. Sorry to hear about all this trouble. Sounds very expensive and painful. At the very least, I’d want to see the financial statements, balance sheet, income statements, cash flow statement and tax returns. I wish you the best of luck.

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Craig Fender January 13, 2013 at 6:51 AM

Neal, thank you for taking the time to respond to my situation. I enjoyed reading your response as well as your thoughts on everyone else’s situation. It would appear that we are set for a merger in the next 60 days and are fine tuning the agreement and what duties and percentages each owner will have. I would be interested in at least corresponding with your contact to discuss our situation. Can you please send me his contact information? Thanks again and I hope you have a great 2013!

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Neal Frankle January 14, 2013 at 9:13 AM

Great. I just sent you the info. Let me know how it works out.

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Neal Frankle January 14, 2013 at 9:16 AM

Craig – your email bounced. Please send me an email at neal dot pilgrim at gmail.com and I’ll get the info to you .

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Marygirl January 11, 2013 at 10:56 AM

We are trying to determine the value of our A/C business, we have had for 6 years. We currently gross 230,00 a year and have a great reputation. We have 1,000 active customers in our database. and approx. $30,000 assets/inventory. How do I determine what the business is worth?
Thanks Marygirl

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Neal Frankle January 12, 2013 at 9:40 PM

I think this would depend on your net income and if that is growing or not. Could you provide more information? Also, have you spoken to any brokers or not?

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William January 5, 2013 at 3:20 AM

Neal,
We’ve been approached by a couple marketing companies interested in helping us sell the business, it might be a good time with my partner essentially ready to retire. These guys are asking for funding up front to show commitment on our side but they solicited us?? We are up for the process but I don’t want to waste money on a valuation if I shouldn’t or is this a serious approach, they indicate the spend 75 to 100k to move all they way through the process to their network of buyers. I feel it is probably a good time to capitalize on the upcoming swing in the construction market. I need some help with getting a ball park valuation in my head to see if we would even turn the company over.

We are a specialty underground contractor with average cash flow based on financials of $1.4M/yr and $2.5M based on tax returns over the last five years with about 4.7M sitting on the balance sheet with cash and equipment about 1/2 and 1/2. The last two years have been much lower by choice on our part not to chase work and wear out equipment on non profitable work.

However, numbers are coming back up and we are starting to book work again. With this information is there a ball park you could help us with on an valuation before we get too far down the road with this.

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Neal Frankle January 5, 2013 at 9:29 PM

I would NEVER pay someone up front if they solicited me. Have you spoken with brokers? What have you looked at so far? Tell me more about your process please.

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Kathleen January 2, 2013 at 6:23 AM

We are trying to determine a value for our Photobooth business. Our gross sales are $215,000, we have been growing approx $50K each year and our net income is $60,000 after disbursing $32,000 to ourselves. we have $60,000 in assets, trucks, booths and inventory. We are growing each year and have an excellent reputation in our market. What is the easiest formula to determine our value? Thank you in advance for your help.

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Neal Frankle January 5, 2013 at 9:30 PM

Kathleen, congrats for having a successful business. Again…what steps have you taken so far? What do you think your business is worth? Why?

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Chuck December 28, 2012 at 1:37 PM

I own a wholesale lumber co., we are very specialized and have always made money and grown. I want to sell my business to my son, who works with me. My trouble is coming up with a fair price. We do about 8.3 mil in gross sales and after all expences and salaries are paid, I have a net income of $500,000.00 to $800,000.00 per year. I have about $800,000.00 in inventory , and $650,000.00 in A/R, plus a few hundred thousand in the bank.

I went to a seminar on M&A , but they want to sell your company to an investment group. They claim that my return would be much higher, but I would still like to explore the option of selling it to my son. With that being said, I need to come up with a reasonable value.

Are there people that can be hired to give a realist value of my business ?

If I use the above formula above the sell price would be 10×6.50 FCF (average for 3 years and going up) $6,500,000.00(What about the inventory and A/R’s). If i used the 2×8.3 gross it would be $16,000,000.00

Chuck

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Neal Frankle January 1, 2013 at 7:54 AM

Chuck,

This is a very involved question. If you Google “business consultant” or “business broker” you’ll surely come up with people to speak with. This is a huge decision and I would speak to many people before making a decision. Talk to your CPA as well. Best of luck.

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Larkin December 12, 2012 at 1:27 PM

We are in the trucking business and do long haul and some short haul also we Gross 1,630,000 last year and are looking at 1.7 million this year We were ask if we would sell out but I have no idea how much to ask for our little trucking business We have 10 trucks and 11 trailers any thoughts

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Neal Frankle December 13, 2012 at 1:07 PM

Larkin, I did a search on “selling a trucking business” and I got quite a few good sources. But it seems to be very specific. They wouldn’t list the multiples of gross/net or how to value your “rolling assets”. Have you contacted any specialists in this area? That’s what I would do.

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Tom Brake December 6, 2012 at 8:59 AM

Neal,
I have a small auto repair shop in a small town in central Michigan. We have only been open for 5 years. Shop has been growing at a rate of about 40% a year since we started with no signs of slowing yet, started at a gross of 80k to this year we should be in the neighborhood of 280k. I personally get about 45k a year. I have spent a lot of time and effort to build this with a very high concentration on customer service and honesty. We have by far the best reputation in town for not only our work but honesty as well. This is my dilema, I have been offered a full-time position at the local community college to take over their automotive program, which I have accepted. So I have decided to sell the business. My employee is considering taking it over but doesn’t have the capital to just buy it. My question is what is your recommendation on a price and/or payment terms. I mentioned the reputation part above because not only am I in a time crunch but I am not willing to just sell to the highest bidder and my employee knows that which sort of puts me in a spot.

I appreciate your input
Tom Brake

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Neal Frankle December 7, 2012 at 2:13 PM

What not keep your employee on and have him run it rather than sell it to him. If you are sure you want to sell it, first come up with a fair price as recommended in the post. Then, have the employee make an offer for terms. Believe me, he isn’t doing you a favor. He desperately wants to buy the business because of the growth and also because if he doesn’t, he may not have a job.

You can make a few adjustments of course but remember you own something very valuable. Don’t give it away.

Have you looked into what other repair shops sell for? What is your net? How fast are other shops growing?

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Craig December 5, 2012 at 3:32 AM

Neal, my partner and I own a tree service in Western North Carolina. After 3 years in business together we are doing @ $300,000/year in sales and the business has grown @ 25% each year and I believe will continue to do so. We very quickly established ourselves as one of the elite companies in the area with a very high skill level. We are considering merging with another local company that we have had a good relationship with. They are only doing @ $200,000 in annual sales and will have seen a slight decrease in their sales this year compared to the previous year. I am looking for some advice as to how the merger would take place and where my business partner and I would sit after the merger. There would now be four partners instead of just two and I am not sure how the percentages of ownership would work out. Would it be fair to say my current business partner and I would own 30% each and that the two new partners would only own 20% each? We are currently doing 50% more sales than this other company and our sales keep growing and growing. We would also be keeping our business name as it is much more marketable than our potential merger’s company name. I think that both companies have @ $100,000 in current assets and we each are @ $15,000 in debt which is very low. In your experience what general advise can you give me and what should I be aware of going into this? After the merger I would move into a full time sales and marketing position which I am very eager to do, I feel that this is really where I need to be focusing my talents as I have been doing most of the sales for our business already and I thrive at it. I am also curious how to go about paying myself once I become the full time sales person? The other 3 partners would be making @ $40,000/each per year and it has been discussed that I would have a base salary of @ $20,000/year with the rest of my income coming in on a commission basis of between 5-10%. What are your thoughts on this? I can see the potential for me to make quite a bit more than the other partners even though they would be the ones on the job site doing the hard labor, but isn’t that just the nature of a sales position? Any advice or information that you could share with me would be much appreciated and thank you in advance for your efforts. I hope that you and your family have a great holiday season!

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Neal Frankle December 5, 2012 at 4:31 AM

Craig, this is a very good opportunity for you – and there is nothing wrong for earning more and having a sales vs manual labor position. Sales is where it’s at. OK, on the numbers, you need to be careful. It seems like their business is declining and yours is growing so I wouldn’t be so fast to give them 40% of the whole thing. There has to be some guarantees or incentives for performance. Why not just buy them out and then make the old owners employees? That seems to be the best option for you if you can do it. I wouldn’t give them 40% of a growing company in exchange for 60% of one that is declining unless you thought you could turn that decline around. You really need a business consultant. If interested, email me and I can put you in contact with someone I’ve used before. Best of luck and I also wish you and your family a wonderful holiday!

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Jill December 4, 2012 at 10:16 PM

I own a samll retail store which annual sales are approximately $450,000 -$475,00. My annual net income was approximately $32,000 last year. My sales this year have been declining. I did have to make a change in locations as rent was way too high. Since the move it has been a huge struggle, so my sales have been in the toilet. The more they decline the less inventory I can buy to stock my shelves which as you know you can’t sell them a product if you don’t have it. This year has taken a toll on me personally and financially. I also can not sink any money into it
personally nor are the banks lending money real freely right now. I know the business is a viable business and definitely has a niche in our town. I have spoke to two potential buyers, however I need to come up with a value on the business and am having difficulties since my sales have been declining. How do you figure the multiplier? I also have approx. $48000 in inventory, $15,000 furn/fixtures.

it nor will the banks give me a loan.

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Neal Frankle December 4, 2012 at 10:39 PM

Jill, sorry to hear about the struggles. If sales and net income are dropping you’ll get less for your business unfortunately. I would ask the buyers to come up with a number first if possible. The person who throws out the first number usually is at a disadvantage.

The multiplier depends on the industry etc. Maybe you Google “what is the multiplier for selling an “X” business” or something like that. I would take the multiplier and then add the inventory. This is very specific to the kind of store you have. Let me know how it goes and best of luck! Neal

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Jessica November 27, 2012 at 9:04 AM

Thankyou for your quick response-you brought up some valid points that I have been thinking about as well. The truth is I don’t know what I would do when the 2 years is up and I don’t know that there is anything better then being your own boss. It has its headaches, but at the end of the day I call the shots. So far the business has done nothing but grow and I don’t see much risk on the horizon. I think you are right that it would be difficult to replicate the net income. At this point they are not offering to pay me for my business, but just want to give me the job. I don’t see the benefit in that and think I should probably hang on to it for now.

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Neal Frankle November 27, 2012 at 9:54 AM

Right. I am with you as you present the facts. Lots of people love to take your business and pay you nothing or peanuts. I’ve had the same thing happen to me. Keep growing your business and cashing those checks! Congratulations on your success!

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Jessica November 26, 2012 at 1:56 PM

Neal,
I have had a successful small business for a little over a year that nets about $12,000 a month. Although things were going good and it wasn’t on my radar to do this-I was approached by a bigger business that wanted to buy my company, retain all my employees and clients and give me a contract for 2 yrs to work for them. I am wondering what my business is worth and if this would be a good idea.

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Neal Frankle November 27, 2012 at 2:51 AM

Jessica,

Well…you must be something very right if they approached you. This is involved. You must look at your net income and compare it to what you could earn on the money they will pay you for the business. Also, consider what you will do with your time after your 2 years are done.

If you net $144k a year, the business might be worth close to $1 million or more. What are similar businesses going for? Talk to a business broker as well.

Also, why would you sell anyway? Are there better opportunities elsewhere? Does the business face any risk or is it growing? Personally, I don’t think I’d sell my business or my blog because it would be very difficult to replicate the net income from either. Your situation may be very different.

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Edward October 31, 2012 at 5:29 PM

This article is nuts. No one would pay you 900k for a business that nets 90k. By its very nature, a small business is very risky compared to many other opportunities for an investor. If you net 90k expect a top end offer of about 180k(you would still be lucky to get 150k). If you get your net over 200k then you will get closer to 2.5 to 3x. That is why small business should be buying the underlying real estate on a 15 yr mortgage while you own it.

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Neal Frankle October 31, 2012 at 11:18 PM

Ah…my friend you are confusing net with gross revenue. You are right that the gross multiplier is usually 2 or 3. But the net multiplier can easily be 10. In fact, in this example, the value of the company is indeed about 2 x gross. :) We just got there based on net. Thanks for bringing the point up Edward.

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kurt April 6, 2013 at 7:57 PM

If you are bringing in net 90k for a growing business and you sell for 150k you got ripped off as a seller. When one buys a business they don’t expect to be able to pay it off in full in less than 2 years.

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Christopher July 10, 2012 at 4:25 PM

Here is a question that relates. I am the only employee of the small business that grossed about $600,000 in 2011. I inadvertently saw that my employer paid himself $55,000 in 2011. I wasn’t being nosy, I swear. That’s more money than I cleared. Part of my income is commission based. It’s an e-commerce business and I wear every single hat. I’m only envious of my employer and the most non-malicious way. He has worked smart to get this side business of his where it is at. I on the other hand have worked very very hard to get the business where it is at. He will spend no money on marketing and advertising and expects me to grow the business organically with search engine optimization and guerrilla marketing. I am so busy with every single aspect of making this business successful, I don’t feel as though I’m given fair opportunity to bring in more customers, more sales, and more commissions for myself. I would like to go to him and ask for arrays and I’ve never asked for one before. My responsibilities have all but doubled in the past 7 1/2 years. I am having trouble quantifying my worth as it is a unique situation and I can’t find comparable market comparisons. Any suggestions you may have would be greatly appreciated by both myself and my family.

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Neal Frankle July 12, 2012 at 5:00 AM

Could you open your own shop?

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Alan Lyford February 5, 2012 at 2:07 PM

Wow! On which planet is this happening? I’ve seen a few upto 2.5 times net income but mostly, on deals with earnings in the low 100’s, we’re looking at one to 1.5x max. Oh for the glory days of 1967 when CBS bought HRW for 28x declared net earnings…

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