Some difficulties in valuing small businesses (Part 2 of 2)
This article is a continuation from yesterday’s posting which described some of the challenges in valuing small businesses.
We could list a big variety of things to consider when valuing a small business, such as:
- Reputation of the business
- Purpose of valuation
However, there are other considerations that are the most important to keep in mind when valuing small businesses:
- Assets & Liabilities
When a small business sells, cash, accounts receivables, cars and other assets are generally not included. The seller (owner) is also responsible for paying off current liabilities and other business debt.
Since leases are subject, in almost all cases, to the lessor’s approval, it really has no value. In fact, a capricious landlord may make the lease a negative factor.
- Industry Outlook
Independent businesses face strong competition from national or regional chains and from the growth of franchising. Chains generally have ample funds to “hang in” until they get their share of the market. And, while some local franchises might not be viable and therefore not a long-term threat, they’re still short-term competition. Successful small businesses tend to either be well known and established local operations, or to be able to fill niches that no one else can. Valuing a local variety store in a town where Walmart will probably enter is not the same as valuing a local bakery that probably will never have a large competitor. The outlook for the business has to play a part. Obviously, no one can predict the future, but if McDonalds has a sign across from the local greasy spoon saying “Opening Soon,” it has to affect the value of the greasy spoon, regardless of the numbers.
Remember that the primary reason the seller hires the broker is to sell the business — that is the ultimate task of the business brokerage professional.