What is your business worth? Although not precisely a trick question, it’s not that easy to answer correctly either.  There a lot of factors in play and most of them are in constant flux.

My father, a consummate entrepreneur, used to take me out to accompany him on his business rounds. I was about five years old when he pointed out a building and asked me “How much is that building worth?”  The correct answer was : “As much as someone is willing to pay for it.”

That is still the correct answer.  But to get to that answer one must sometimes go through the circuitous route of developing an asking price for the building.  And that should be based on something besides wishful thinking and a wild guess.  You might have to justify it to a potential purchaser.

That is why I’m glad to see a new site called Biz Equity come on the scene.  At least, it’s a starting point.

What is BizEquity?

Bizequity is a free service that provides estimated value of a category of business, or a custom valuation, based on industry-specific “rules of thumb“.  Of course, there are different “rules of thumb” that might be used.  And the site clearly states: “A valuation completed by a CFA or other expert is a more thorough and legally valid assessment which considers business aspects and sources of information that BizEquity might not have access to.” Although that might be true, both valuations are still hypothetical until someone offers cold, hard cash for your business.  Then, many other factors come into play.

Is your business in a “sexy” industry”?  It might be worth more.

Is it a bear market?  It might be worth less.

Is it “hot”?  More. Or “not”?  Less.

Right now, as we all know, we are in a bear market, one which is depressed with prices for business buy outs headed South.  In essence, whatever your valuation, now is probably not the best time to sell.

When is the best time to sell?

When you have a motivated buyer who, for one reason or another, is willing to pay a top price for your business.The value of many businesses may be falling. If you can, it might be in your best interest to wait for a better business climate to offer your business for sale.

Once, I went for seven years without being able to find a buyer for a certain mineral lease I was handling.  Nobody would touch it. And believe me, I approached every company or indiviual I thought might be remotely interested. The only interested propect was a geologist who couldn’t afford to pay more than $5,000 for it, when the price should have been in six figures.  I turned him down.  Not that I didn’t need $5,000.  It would have come in very hand.  But I wasn’t going to lose a six figure price which I believed I could get eventually, in order to get $5,000, now, thanks very much.   ( Of course, I was also a little encouraged that the geologist wanted it; they’re the ones who develop the theory about what’s under the land.  He thought something was.  I didn’t care whether it was oil, gas or urananium….or even gold or lollipops….as long as someone paid for it.)

How do you find a motivated buyer?

A truly motivated buyer will find you. Otherwise, you need to keep abreast of your industry. Read everything.  Know the players.  Know which other businesses have an eye on expansion and with whom your business would be a good fit.

How do you get the best price?

Competition. One day I woke up and someone was knocking on my door wanting that lease. Times had changed.  Suddenly the property was hot again.  In fact, suddenly two companies wanted it. And the next thing I knew there was a bidding war in the hall way and the price went up an additional six figures in a minute or two while I stood there trying not to smile too much. After I had the incredible luxury of selecting the lucky buyer, we walked over to his hotel room to fill in the contract, sign it and I picked up my check.

It’s good to start thinking now about all this because, someday you will have to sell your company, unless someone in your family will run it or be responsible for someone else running it.

But, the main consideration for you right now, in this bear market, is to maintain enough cash to survive.  That will guarantee that you can sell when you want to, not when you have to. That’s when you can toss away valuations like bizequity, because your business will be worth whatever it is someone is willing to pay for it, when times are rosy and their hopes are high.