As I go on listing appointments, I caution sellers that there are two ways in which one can normally value small businesses (notice the word “normally” and “small”). One way values Tangible Assets, such as inventories, receivables, furniture, fixtures and equipment. The other uses a multiple of Owners Benefit (Operating Profit plus owner’s salaries, depreciation, amortization, interest and personal benefits charged to the business). In other words, if your business generates minimal or no Owner’s Benefit, what you are really selling are the business’ tangible assets—what we business brokers call an Asset Sale or Sale of Assets--depending on which broker you talk to.  Before I get most of my colleagues upset, let me explain that by definition an Asset Sale normally includes some level of goodwill and normally represent about 90% of our sales, the other being a Stock Sale.  So, in this blog I am using the words Asset Sale loosely.  Having said that,  ordinarily, you would not be able to sell your business for an amount greater than the market value of those assets—market value is in the “eye of the beholder.”  However, buyers normally define Market Value at 20-30% of the assets’ original value--please notice I said "buyers." 

What is it about most of us who decide that “cheap” is better? We do it when buying clothes, shoes, furniture, car, etc, only to find out, in most instances, that our decision was not a good one. Why?? Because in the very short term, clothes look like hell and soon deteriorate, shoes fall apart and last only a few months, and our furniture rips apart easily, forcing us to go buy the same things within months-- doubling our expense!!  We do the same when buying a house.  We forgo the best location--in front of a lake or preserve-- to save a few thousands only to lose thousands more at the time of sale.  Remember, location, location??