The value of a business depends mainly on the earnings it produces, with the expectation that those earnings will continue into the future. It also depends on having something valuable to sell that allows those earnings to be produced. So if you have a small/home business, the questions you must ask yourself are:
Can a qualified person walk into my business, take over, and earn the same amount that I do?
Some businesses, quite simply, are purely based on the person. The business IS the person. For example, in most cases an author can’t expect to sell their business of writing books. Many small consultants are based on the narrowly focused expertise and experience of the consultant. Without the consultant, the business is not worth anything. But there are many home businesses that have worked out a formula or process that is indeed transferable and valuable. If you can teach a new owner how to take over and earn the money you have been earning, it is likely worth something.
What are the qualifications to run the business, and can I reasonably expect to find a buyer with those qualifications?
Sometimes the business is valuable, but only to a select few people, and it can be a challenge to find them. For example I’m selling a flight school right now that owns three airplanes. The only way a person could make this work is to be a flight instructor, because there isn’t enough money to be made to just sit back and manage the business. This narrows the universe of possible buyers, and I have to look in the right places for a buyer.
Do you really have something to sell?
Some home businesses are based on a formula or process that is easily obtainable. In other words, someone else can easily start such a business without having to buy it. There must be some “barrier to entry”, that prevents others from doing the business without paying you for it. However many small business owners know more than they think they do. I’ve met some that believe their business isn’t worth anything because someone else could “probably” just start up a similar company. Often someone else can not, or at least not without substantial risk. That is exactly why people buy businesses – to minimize the risk of starting one. Items that minimize risk, and therefore are of value are:
- Ongoing and sustainable repeat customers
- Goodwill built up in the name of the business
- A process or formula that isn’t easily reproduced
- Work-in-process or a “book of business” that decreases barrier to entry
The good news is that most home based businesses are re-locatable, so anyone, anywhere can purchase it. That is a big plus, and in fact many of the business-for-sale websites like bizben.com, bizquest.com and bizbuysell.com allow you to search for re-locatable businesses.
Unfortunately the multiple of earnings for really small businesses is fairly low, probably averaging 2 times. That is because many amount to “buying a job”, and the value of one job (no or little extra money for savings) isn’t worth as much as a company that throws off enough money for a salary AND savings.