Business Valuations vs. Selling Price
Sometimes it’s a hard concept to explain, but there is a distinct difference between the value (valuation) of a business and its suggested selling price. How can that be?
Here's an example. Using our formula, it is not that unusual to arrive at a $500,000 value for a business, but in the same breath recommend that a "fair market" selling price for that business might be $425,000.
How does that happen? Because in almost all transactions involving the sale of a business, certain assets (equipment and inventory as an example) are sold, but other assets are retained by the seller.
A perfect example of that would be a business that has $20,000 in a savings account. You normally don't sell cash, so that would be retained by the seller.
Another example would be a situation where the seller wants to keep the company car that he has been driving and a fair market value for the car is $18,000. That $18,000 would be excluded in our estimated selling price, but that $18,000 is part of the overall value of the business.
Another situation is that an owner typically retains the rights to the AR as of a certain date, but also assumes responsibility for taking care of all AP. The list goes on, but I think you see what I mean.
Our formula calculates the value of all the assets (tangible and intangible) to be sold, but it also assumes that the owner will benefit or keep certain other assets of the business. And it is the value of these retained assets, plus what the seller receives from the sale, that truly constitutes the full value of the business in question.
If you have any further questions as to business valuations, we suggest that you visit our page on business valuations at:
www.quickconsultant.com
and/or
www.printshopsforsale.net.
The second site maintains and updated Q&A section that answers many questions on valuations that we have received since our book "Print Shop for Sale" was first published.
Sometimes it’s a hard concept to explain, but there is a distinct difference between the value (valuation) of a business and its suggested selling price. How can that be?
Here's an example. Using our formula, it is not that unusual to arrive at a $500,000 value for a business, but in the same breath recommend that a "fair market" selling price for that business might be $425,000.
How does that happen? Because in almost all transactions involving the sale of a business, certain assets (equipment and inventory as an example) are sold, but other assets are retained by the seller.
A perfect example of that would be a business that has $20,000 in a savings account. You normally don't sell cash, so that would be retained by the seller.
Another example would be a situation where the seller wants to keep the company car that he has been driving and a fair market value for the car is $18,000. That $18,000 would be excluded in our estimated selling price, but that $18,000 is part of the overall value of the business.
Another situation is that an owner typically retains the rights to the AR as of a certain date, but also assumes responsibility for taking care of all AP. The list goes on, but I think you see what I mean.
Our formula calculates the value of all the assets (tangible and intangible) to be sold, but it also assumes that the owner will benefit or keep certain other assets of the business. And it is the value of these retained assets, plus what the seller receives from the sale, that truly constitutes the full value of the business in question.
If you have any further questions as to business valuations, we suggest that you visit our page on business valuations at:
www.quickconsultant.com
and/or
www.printshopsforsale.net.
The second site maintains and updated Q&A section that answers many questions on valuations that we have received since our book "Print Shop for Sale" was first published.
posted by The Quick Consultant at
9:42 AM
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