Appraising a Sole Proprietorship

by Terry Masters, Demand Media
Establishing an appraised value for a sole proprietorship is not an exact science.


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Setting a sales price for a business operated as a sole proprietorship can be difficult. Each sole proprietorship is different, and insider information on the sale of comparable businesses is typically not available to the public. Until the point that a business is sold for a price that a buyer is willing to pay, any valuation or appraisal of the business is an estimate.

Asset Valuation

One of the most basic ways of appraising a sole proprietorship is by establishing a value for the company's assets. A sole proprietorship is not an independent business entity like a corporation. The business is operated under the name of the owner, so all assets are in his name. A sole proprietor may use assets for both business and personal purposes, so an asset valuation approach to establishing a price for the business asks the owner to separate which assets he wants to sell as part of the business. The business would be worth at least as much as it would take a person to buy those assets from a third party.

Income Valuation

Valuing a sole proprietorship by looking at its assets does not take into account the many intangibles that make a business successful, like customer base, loyalty and brand recognition. Another way to appraise a sole proprietorship is by looking at its revenue. The amount of money that a business makes is sometimes a good indicator of its future potential, so an appraisal based on revenue might set a business value at a multiple of yearly sales. However, a sole proprietorship is an alter ego of the owner without an independent existence, so the income stream of the business is much more likely to be specifically dependent on the professional identity of the owner. An income approach to valuation of a sole proprietorship must discount the income stream if revenue is likely to decrease once the original owner is no longer involved with the business.

Earnings Valuation

A sole proprietorship with lots of sales does not mean that the business is profitable. An earnings appraisal looks at the company's bottom line after expenses are deducted from gross income. It sets a value on the company that is a multiple of the amount of money the owner makes every year in profit. Some sole proprietorships are service based, relying heavily on specialty work done by the owner. These types of businesses have only one major asset -- a client list. An earnings valuation of a sole proprietorship that relies on a client list would assess the likelihood of current clients staying with a new owner if the business is sold and then estimate the likely profit from the list after expenses are deducted from revenue.

Composite Analysis

Expert business appraisers often use a composite analysis that takes into account revenue, cash flow and profitability to determine the value to a buyer of the income from the sole proprietorship into the future. Appraisers do research on similar types of businesses that have sold recently and use their judgment to add a premium to the valuation that accounts for intangibles like brand recognition. Appraising a sole proprietorship is more speculative than appraising any other type of business entity because the business is so closely tied to the owner.

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