Business Valuation For Sale

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inventory at sale would be valued at cost

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Inventory would be valued at FMV

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Equipment given to buyer valued at FMV.

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Correct

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How would you put a value on the operations/goodwill of the business

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Goodwill is simply the difference between FMV of the assets and liabilities at purchase, and the purchase price.

2-4x cash flow depending on cash flow size. Anything under $1M is likely 2-3. Anything over $1 is closer to 4.

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How would you put a value on the operations/goodwill of the business?

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There is a range calculated from historical industry norms for this type of valuation.

The industry operation/goodwill values for Antique Store are different from a restaurant or a lumber yard.

For the seller, the proceeds from the sale specifically for the inventory and property are taxed at a different rate than is the money received from amount designated goodwill (a/k/a “blue sky”) value.

The seller wants a lower proportion of the total Sale amount to be from the inventory and property. The IRS has standards that they apply on what’s proportionally appropriate and if a transaction exceeds their norms, it may trigger further investigation by the IRS.

PS: I am not a CPA or an Attorney or both; anything I’ve offered here should not be construed as legal or financial advice. Tell your friend to seek competent counsel.

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inventory at sale would be valued at cost



Inventory would be valued at FMV

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Inventory is valued at cost.

Inventory is valued at the lower of cost or FMV during normal operations. When a business is sold, all assets get written up to FMV so the inventory value for the new owner is FMV, which also happens to be their cost.

Source: I am a CPA that has gone through multiple business acquisitions.

Most value the assets at book value at the time of sale and the excess gets thrown to goodwill.

Don’t really think that’s what OP is talking about though. Thinks he wants to know what his business is worth which there’s not one solid answer there. A lot of factors go into those valuations. It’s going to be worth your time to go through specifics with a CPA. Most will do valuations.

1. Not everyone is required to be GAAP. I’m guessing someone who has his buddy posting on a message board about it isn’t GAAP.

2. How are you going to come up with FMV of the inventory? If you’re doing an asset sale, you will have to agree to a purchase price allocation with the buyer. 95% of those value the inventory at book value at the time of sale. Thus book value = FMV because that’s what the buyer is willing to pay for it in an arms length transaction.

3. Advise to OP is still see a CPA to go over specifics. There are times when you don’t need them. This isn’t one of those times.

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Mingo Was His NameO

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So...

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My mistake for thinking someone would want the transaction handled correctly.

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It seems that inventory at sale would be valued at cost.

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Inventory would be sold at an agreed upon value. Some may be worth less than current owner paid (i.e. a bad buy). Some may be worth far more.

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Equipment given to buyer valued at FMV.

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Correct. A good view of value there is cost to replace but have to look at age/depreciation.

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How would you put a value on the operations/goodwill of the business?

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Really depends on repeat customers, value of Name of business, employees and length of time they have been there, online presence built (FB, IG, EBay), etc. You can get a good value of revenues generated from repeat customers, online sales and what it would take to replace your current employees then swag a value. But just know it'll be negotiated and isn't some exact science.

But for Goodwill on a small business it really depends on if the business is Owner operated and much of that goodwill leaves when owner leaves. To account for this a payout is done. Many new buyers of small businesses do a payout based on this. For example, in Year 1, pay $Y to previous owner if $X Revenues are hit, Year 2 $W to previous owners if $Z Revenues are hit and so on. I have seen three year and five year payouts for Goodwill portion.

Stumbled across this thread. What type of company is this?

Valuing a company is similar to appraising real estate: three approaches.

Asset approach: Your base value or “floor value” is the fair market value of your assets less the liabilities.

Income approach: If your business is profitable and generating good cash flow you may have intangible value. Your intangible value can be determined by calculating a sustainable yearly cash flow number (adding back non-cash and discretionary expenses) and dividing that number by a capitalization rate reflective of the risk present in your business. Or you could do a discounted cash flow model. General rule is if your operations are consistent year in and year out, do a capitalized cash flow model, if your operations are up and down and less predictable, do a discounted cash flow model.

Market approach: simply research what businesses like yours sell for, perhaps a multiple of EBITDA or revenues.

An income approach is generally the best method for determining the FMV of a going concern business.

That said: fair market value does not have to equate to sales price, hopefully you can get more but determining the FMV using the above approaches can give you an idea of the range you’re looking at.

Happy to answer questions