How to Determine the Price for a Business for Sale
How to Determine the Price for a Business for Sale
Iluthrin
When it comes to purchasing a company, determining its value can often be a challenge. Those in the business of mergers and acquisitions feel that it is a combination of art and science. Determining the price of a technology business for sale can be even more daunting, especially if the technology business is a start-up. As a prospective buyer, what is a fair and accurate way of determining price?
For technology start-ups, there are a couple of approaches that have been used over the past decade. They include the cost approach, discounted cash flows, rules of thumb, and milestone valuation approaches, to name a few. Each approach attacks the company valuation problem from a different angle.
The rules of thumb approach uses comparable sales of other companies, within the industry, to determine a relative valuation. Additional rules of thumb are used to add or subtract from this valuation.
For example, if a comparable company sold for $10 million and had $1 million of sales and no head of marketing, then the company being valued that has the same level of sales, but does have a head of marketing may be valued at a level somewhat higher than $10 million, adjusting for the successful build-out of the marketing role and the hiring of a key employee.
Regardless of which valuation method that is selected, there a couple of common guidelines that are followed:
Business for Sale - Common Valuation Guidelines
1.) Intellectual Property (IP) must be valued, independent of the company's valuation.
2.) The market size and growth rate of the industry must be reviewed.
3.) If the buyer is evaluating the purchase, from a strategic or synergistic perspective, the impact on the acquiring company's business must also be measured.
While evaluating the value of a business for sale can be daunting, it can be done and is done every day. The key to a successful valuation is to learn as much as possible about the company being acquired. Having such data will allow the potential acquirer to better gauge, which valuation approach to take.
Iluthrin
