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EcommerceBytes-Update, Number 307 - March 18, 2012 - ISSN 1528-6703     4 of 6

Four Things Online Sellers Should Know About Business Appraisals

By Barbara Weltman

March 18, 2012

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Do you know how much your online selling business is worth? To know this, you need to have your business appraised. Business appraising is not an exact science, but the result can give you a good idea of what your business is worth, and the same principles apply to online retailers as other types of businesses.

1) Business appraisals aren't just for selling a business
Business appraisals are essential when selling a business. But knowing what your business is worth can also be helpful for:

Casualty losses. To take tax deductions for uninsured losses, you need the value of business assets.

Divorce. If you are undergoing a marital dissolution, you'll have to determine the value of your business (unless you have a prenuptial agreement stating that the business is not a marital asset but rather your separate asset).

Estate planning. Knowing what the value of your business is enables you to plan for it upon your death.

Gifting interests to your family members. To set the amount of the gift, you need to know how much the business is worth. For example, say your business is a limited liability company and you own all of it. By determine the company's value, you can decide how much to give away and whether there are any federal gift tax costs for doing so.

Lawsuits. When seeking damages for business injuries, you need to know the impact that those injuries have had on your business.

Retirement planning. While the value of the business now may be different from what it's worth when you ultimately retire, knowing its current value can give you some idea about whether the business will be able to provide you with retirement income. If there is only nominal value to the business, you should be saving for retirement through a qualified retirement plan and personal savings.

SBA loans. An appraisal is part of the loan application (depending on the program).

2) There are different valuation methods
You may have heard that the value of a business is based on its annual revenues. This may be true to some extent. There are various formulas used to determine the value of a business. Some are based on revenue (e.g., two or three times annual revenue equals a company's valuation).

However, there are a number of sophisticated formulas that can be used to better fix the value of a business. These formulas take into account not only revenues, but also the values of inventory and other tangible assets as well as the values of intangibles (e.g., trademarks, goodwill). Note that a seller's customer list/email marketing list could be considered an asset, and an eBay seller's feedback may be considered part of goodwill.

The formula that's used depends on the purpose for the valuation. Here are some formulas that are used:

  • Asset and earnings valuations (factoring in intangibles such as goodwill)
  • Asset-based formulas (based on book value or liquidation value)
  • Comparables (what similar businesses have sold for)
  • Earnings (revenue) formulas (multiples of revenue or capitalization of earnings)

3) Where to obtain a business appraisal
There are many people who hold themselves out as business appraisers. In most states, there are no licensing requirements, so anyone can call him-/herself an appraiser.

If you need a qualified appraiser (someone who meets certain professional standards and experience) for tax or legal purposes, ask your legal or tax advisor for a referral. You can also find one through:

4) What it costs for a business appraisal
What you pay for a business appraisal depends in large part on the purpose for which you are obtaining it. The more comprehensive the appraisal needs to be, the more it will cost you. For example, if the appraisal is designed only to give you a rough approximation of what your business is worth, consider using free online tools from Dinkytown, FastBusinessValuations, or FreeValuationsOnline.

There are also online appraisal services that provide a more precise (but not full-blown) estimate for only a few hundred dollars, such as:

If you need the appraisal for legal or tax purposes, the appraiser must be qualified, provide more details, and will charge more. As a general rule, expect to pay between $3,000 and $10,000, depending on the size and complexity of the business.

Final thought
You can know what your 401(k) or other retirement plan is worth just by looking at the monthly statement. But you won't know what your business is worth without obtaining an appraisal.

About the author:

Barbara Weltman is an attorney, prolific author with such titles as "J.K. Lasser's Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business," and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of "Idea of the Day(R)" and monthly e-newsletter "Big Ideas for Small Business(R)" at http://www.barbaraweltman.com and host of "Build Your Business" radio. Follow her on Twitter: @BarbaraWeltman.

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