1

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?

1

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 g.

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.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.