Planning a Small-Business Valuation and Sale

Devaney, Michael
July 2003
Journal of Financial Planning;Jul2003, Vol. 16 Issue 7, p56
Academic Journal
The article discusses the factors to consider in planning a small business valuation and sale. The time required to sell the business may also vary based on the size, geographic location and nature of the business. Some businesses may be marketed nationally, while others, such as beauty parlors or taverns, are typically sold to local buyers. Small-business sales are often characterized by asymmetric information, meaning the seller possesses more information on the business than he or she is willing to share with potential buyers, particularly information that may negatively influence the final price. In theory, the value of any asset is equal to the risk-adjusted present value of the future cash flow generated by the asset. Some valuation techniques place more emphasis on the future while others emphasize historical performance. Generally, the earning power of the business is accorded the most importance in business valuation--hence, the emphasis on the discounted value of future income. Business valuation is the analysis and processing of market information. Ideally, there is an abundance of data, and each valuation approach results in the same estimate of fair market value. Many financial planning clients will use retirement funds to purchase a small business or fund their retirement from investing the proceeds from the sale of their small business. INSET: Choosing a Business Appraiser.


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