"The future belongs to those who prepare for it." Ralph Waldo Emerson If you are thinking of selling your business, coming up with an asking price is a task loaded with emotion, wishful thinking, unrealistic assumptions and even fear. Sure, you are a pro at pricing a product or your services, but a price tag on your business, that is a different matter. But don’t feel bad, some professionals are not much better at it. They will ball park the price from a fire sale to a lofty demand no one will offer you. If you are serious about selling your business- calculating a price that will nab a buyer and reward your years of efforts and success will require research and effort. Professionals can be helpful, but the foundation must start with you. After all, who knows your business better than you do, and are you not a businessperson? Successful businesses earn money and it is the earnings coupled with the potential of future earnings that determine its value. It is only common sense that the higher your net profit rate, the more your cash cow is worth. If you are losing money, don’t expect riches and a yacht. When Wall Street talks about price earning ratios and the effect on stock prices, they are talking about earnings. And earning power determines the price of stock or the capitalization( value) of the company. Your venture may not be on traded on Wall Street, but its market price is determined by profits. How so? The experts multiply the earnings or profits by a predetermined ratio (I don’t want to get technical but the ratio is effected by the market and the interest rate) Today the average ratio on Wall Street is 20. If a stock earns $1.00, the market value of the stock may be $20.00. If your business earns $100,000.00 using a ratio of 20, your pet will be worth a cool $ 2 mil. However, you are not on Wall Street and the ownership of your business is not trading in a liquid market- and that changes the ratio. Realistically, a ratio of five or six is the average for the value of most small businesses. If you earn a $100,000.00 before taxes, and have a reasonably clean balance sheet, your business should fetch a minimum price of $500,000.00. If your business is in a growing market or industry with an upside potential of greater profits –perhaps, you can apply a ratio as high as 10, or a cool million for your efforts. Before you put the "for sale" sign in the window, sit down with your accountant and see if you need to restate your earnings. The calculation of profit to establish a price may be quite different from your reportable net profit for taxes. If you as the owner are on a salary, and take reasonable perks-- nothing unusual- just add back the depreciation to your net profit. If you dip heavy into the till so you can buy many toys, restate your personal rewards back to a reasonable level and refigure your profit. The earnings that will peg the price must represent reality and the profit the buyer is willing to paying for. Overstating your profits is misleading and may cause you a future legal nightmare. Understating is shooting yourself in the foot with a too low selling price. Any basic accounting text will tell you, the real value of your business is based on the concept of a “going concern.” That is, your business-being in business-with its customers, market share, reputation, management and employee structure, and cash flow, are worth more than the value of your land, building, equipment, inventory, etc. Thus, don’t break up your company to sell it off in pieces . Remember, the whole is usually worth more than the dollars breaking your business will fetch-unless you are holding some extremely valuable real estate. And if that is the case, move your business, sell the real estate and then market your business. Businesses that are successful with a customer or brand following, have assets worth bucks- assets some firms list on their balance sheet as “intangible assets.” The dollar value of your market share and reputation comes from your hard work-get paid for it. Next week I will write about why you need to incorporate your business, and how your losses can be an asset when you sell your business. Copyright 2003 Paul E. Adams Dr Paul E Adams, Professor Emeritus Business, Ramapo College of New Jersey & Retired Entrepreneur, Syndicated Columnist, Host of the access cable TV program "Tri -State Movers and Shakers," and Author of “Fail-Proof Your Business,” Available @ Amazon.com. Comments, questions, or suggestions to: xpaul@pikeonline.net