What is a business worth? My wife and I left the University life 30 years ago to go into business for ourself. We purchased a small general store in a rural area. Over the years we have had several additions as well as added gas, diesel and kerosene. Business has been good and so has life. I'm ready to move on to the next part of life but------How does one determine the value of the business of a convenience store. Is it as simple as 1 x annual sales plus building and land???? Does anyone know of a internet site that discusses how to value a business. We have a real unemployment rate of 20% in our area, of course that will reduce the value but we expect the economy to start to recover mid 2010.
Theoretically, the value of a business (or any asset) is the present value of its expected future cash inflows. Assuming the business will last a long time (50 years or more), simply divide the annual cash flows by an appropriate interest rate (example: the cost of borrowing money to buy a business). So, a business that generates a positive cash flow of $100,000 a year at an interest rate of 5% would be worth $2 million. If the interest rate were 10%, the value would be only half that, or $1 million.
Other things are often considered in valuation, such as goodwill (brand name of the business is well known and loved by its market), general economic conditions, and, of course, the value of assets less liabilities.
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