Having a business for sale can mean a lot of things : more than people might think. 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 methods for approaching the process to find the value.
There are the three main approaches to value, which are the income approach, the market method, and the asset approach. There are variations of these approaches, and combinations of them, and things which must be checked out because each and every business will have variations of what gives the business worth, and some of these differences are considerable.
First we must identify the type of sale: stock sale or asset purchase. A stock sale is the sale of the organization stock; the buyer is buying the company based upon the value of its stock, which usually represents everything in the business: earning energy, 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, although 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 plus E: This abbreviation stands for home furniture, fixtures, and equipment. These are the particular tangible assets used by the business to work and make money. All businesses (with a few exceptions) will have some quantity 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 earnings.
2 . Leaseholds: the leasehold may be the lease agreement between the owner of the property and the business that rents the property. The agreed upon leased space typically goes with the sale of the company. This can be a significant value, especially if it comes with an under market rate currently charged and the lessor is obligated to carry on with the current terms.
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3. Contract rights: many businesses do business depending on ongoing contracts, agreements with other entities to do certain things for certain periods of time. There can be immense value in these agreements, and when someone buys a business he or she 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. Building contracting is one of them. So is accounting. For a buyer to buy a business, his 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 selling.
5. Goodwill: Goodwill is the earnings of a business above and beyond the reasonable market return of its net tangible assets. In other words, whatever the business makes in excess of its identifiable assets is recognized as “goodwill” income, where there exists a synergy of all of the assets together. This one can be tricky. Most business owners presume 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 of its identifiable assets, there exists negative goodwill.