Valuing a small business comes down to negotiation. In this situation, you may even be able to use the poor state of the books as a point of leverage to get a better price.
The best (or at least most common) way to value a small business is as a multiple of net income. This varies from industry to industry and from business to business. In this case, it would be to your advantage to find this information out for your own purposes. If you have a good idea of what the business might sell for, you know how much wiggle room you should have in your negotiations.
In the end, it comes down to how much money will make your boss satisfied. If that's less than the assessed value of the business, that puts you in a very advantageous position in the future.
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