How to value a business for sale?

People sell profitable business for a variety of reasons: from wanting to retire to needing the cash to start another venture. It's often the case that buying small business that are not yet profitable but have potential leads to a high return on investment when they start producing a profit. The process of valuing a business for sale will depend on the type of business and its circumstances.

Franchises

A franchise is a new business that uses the existing business model of an established company. This includes the business idea, branding and in many cases even suppliers and marketing material. When you buy a franchise you buy the permission and resources to use the business model and need to stick to the rules of the mother company, but you decide how to manage your company. There are many types of business franchises for sale, from small franchises based at home to big independently run shops belonging to a multinational chain. How much is a franchise worth?
Usually the franchisor will have a set price for a license, and the contract will clearly specify the resources that go with that price and estimated results. You can estimate the value of a franchise yourself by looking at the results of other franchisees in geographical areas with similar demographics to you, and by researching the franchise in question on business evaluation forums.

Independent business

Many people choose to sell a business either because they cannot make it successful or because they want the money for something else. A profitable business is less of a gamble, and so it's usually more expensive that one that fails to make money. The value of a business will depend on how much would it cost you to start from scratch, and what are the company cash-flow forecasts under your leadership. Profitable business
When conducting a business appraisal of an existing, and profitable, company the business owner probably will give you detailed reports on the cash-flow of the company. It is advisable to check those with a third party and to ask as many questions as you need to ensure that you are indeed buying a profitable company. For example, is the company getting great prices from suppliers because it has a business discount or because the supplier is a personal friend of the owner? Non profitable business
There are many reasons why a business who isn't profitable could be a great buy, starting with the fact that it'll be generally much cheaper than a profitable one. Value the business against the profit you can make out of it, by changing how things are done or using your network to improve its competitiveness.