I recently sold part of my small business to one of my employees. Mine is a service business - an engineering company - so it's a bit different. Anyway, we went through various scenarios on how to value the business. One simplistic way to at least get some sort of ballpark number is to take the total yearly profit - let's say that number is $100K - and figure out how much someone would need to invest to realize that amount of interest in 1 year in, say, a mutual fund - one would need to invest $1,000,000 @ 10% to see the $100,000 return. Would that same person be willing to 'invest' his million in your business for the same return? Probably not, since the risk would be much higher. But what if he doesn't have the million $$ in the first place?? Well, you can finance the deal for him by 'loaning' him the money (i.e. selling it over time via monthly payments) and get the price back up to a million $$ or more.
The bottom line for small businesses is you come up with several different numbers from the beancounters as a starting point - then you throw them all out and start negotiating .....
