When buying, or selling a business, it is of paramount importance that each party involved be realistic about its value.

Even more than a piece of real estate, a business often takes on a sense of pride to its owner, and a  romantic feel to someone considering its purchase. However, at the end of the day, a business is only worth what it generates.

Selling or buying a business often involves very few hard assets, and more “Goodwill” of the ongoing business. With real estate, the subject property (the “hard asset”) will be valued based on other “comparable” properties, with adjustments made for various factors such as condition of the property, difference in square footage, and/or specific location. With a business, the business will tend to be valued based on its previous year’s sales, costs, hard assets (adjusted for condition), and how much of a “lock” the current business tends to have on its customers/clients (its “Goodwill”). To estimate the value of a business based on its goodwill, a “Business Multiplier” is typically multiplied against the previous year’s sales revenues. A key here is to find a comparable industry multiplier. For example, a service which is easily replaced by a competitor “just down the street” will have a lower multiplier, and therefore a lower valuation, than a highly-skilled, high barrier-to-entry type of business, such as a medical practice.