I am trying to guess a price to sell my small business. I don't understand a thing in the perpetuity formula. Which is the correct rate I have to put on it?
In the equity markets, the P/E is usually somewhere around 15. The P/E can be viewed as the inverse of the rate of a perpetuity.
Since the average is 15, and the E/P of that would be 6.7%,
r should be 6.7% on average.
If your business is growing, the growth rate can be incorporated like so:
p / ( r_g - g ) r = r_g - g
As you can see, a high
g would make the price negative, in essence the seller should actually pay someone to take the business, but in reality,
r is determined from the
p and an estimated
For a business of any growth rate, it's best to compare the multiple to the market, so for the average business in the market with your business's growth rate and industry, that P/E would be best applied to your company's income.