Business valuation appears as a myth to most business sellers. It seems like a complicated science that only a few analytical minds can grasp. The reality is that valuation is more an art than a science. A business is worth what a buyer is willing to pay for it. Unfortunately they is no magic number you can put on a business and guarantee it will sell for it.
The most used method for putting an asking price on a business is the Seller Discretionary Income (S.D.E) method. Income statements are first readjusted to reflect the real income of the business. Profits from operations before tax are added to the owner salary, depreciation and interest paid to banks.The total is then added to the owner non-business related expenses. The asking price is then arrived at by multiplying the total by a multiplier between 1 and 3 depending on the profitability of the business, the competitiveness of the industry, the business dependence on the owner, the seller's willingness to finance a part of the purchase price etc.
This price is then used to market the business. Potential buyers can then understand the logic of how the price was arrived at and are one step closer to putting an offer on the business. Business sellers can also hire an independent business valuator. Certified business valuators have received special education and training that qualifies them to do business valuations. Furthermore, because they are independent and have no conflict of interest, their valuation is unbiased. Sellers have to verify that they choose experienced professionals who are up to date with the latest changes in the business for sale market.