Developing a business for sale can mean a lot of things — more than people might think. So how exactly does one business value compare to another, and how to arrive at that value? Since there are many types of businesses that exist for many different industries, it stands to reason there are numerous means of approaching the process to find the value.
You can find the three main approaches to value, that are the income approach, the market approach, and the asset approach. There are variations of these approaches, and combinations of these, and things which must be looked over because each and every business will have variations of what gives the business worth, and some of these differences are significant.
First we must identify the type of purchase: stock sale or asset purchase. A stock sale is the sale of the business stock; the buyer is buying the business based upon the value of its stock, which usually represents everything in the business: earning power, equipment, goodwill, liabilities, etc . Within an asset sale, the buyer is buying the company assets and capital which enable the company to make profits, but is not necessarily assuming any liabilities with all the purchase. Most small businesses for sale are sold as an “asset sale”.
Our issue, when selling a business or buying a business, is this: what are the assets considered to arrive at an accurate value? Here we will take a look at some of the most common.
1 . FF and E: This abbreviation stands for furnishings, fixtures, and equipment. These are the tangible assets used by the business to work 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 in the value as determined by the income.
2 . Leaseholds: the leasehold could be the lease agreement between the owner from the property and the business that rental prices the property. The agreed upon leased area typically goes with the sale of the company. This can be a significant value, especially if there is an under market rate currently billed and the lessor is obligated to carry on 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 he or she is buying the rights to these agreements.
four. Licenses: in certain business sales, licenses do not apply; in others, there may be no business without them. Building contracting is one of them. So is human resources.
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For a buyer to buy a business, their purchase includes either buying the license to the company or the license towards the individual. Often times, the buyer will require the access or availability of the license as a contingent element of the sale.
5. Goodwill: Goodwill is the revenue of a business above and beyond the reasonable market return of its net touchable assets. In other words, whatever the business can make in excess of its identifiable assets is considered “goodwill” income, where there exists the synergy of all of the assets together. That one can be tricky. Most business owners suppose they have goodwill in their business, yet goodwill is not always positive; there is certainly such things as “negative” goodwill. If the business makes less than the sum total from the identifiable assets, there exists negative goodwill.