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Planning to Sell Your Business? - Know What Your Business is Really Worth
Most business owners have no idea how much their business is worth, and those who are keeping score are often too optimistic in their estimates. Valuing a business for sale is both an art and a science, so using general rules of thumb, as many owners do when they begin the process, has very little basis in reality. It's a mistake, anyway, to try to put a price on the business as if it is a real estate sale. In the business selling world, the business owner doesn’t set the price; the market does.
It's not surprising then that most business owners are disappointed when they finally have their business valued by a professional. However, if a valuation is done well before engaging in the sales process, a business owner may have ample time to take measures to increase the value of the business.
In most cases, the sale price and the deal structure will be determined on the basis of who is buying the business. For instance, if the buyer is one of your executives, you may structure a deal in which you receive installment payments and the ultimate price will be based on the actual cash flow generated over the installment period. Or, if a buyer simply wants to buy and liquidate the company’s assets, then the value of assets will determine the sale price. You are more likely to receive a premium price when you sell to a third party buyer than to a family member.
The Science of Valuing a Business
It usually requires the expertise of a valuation professional, preferably a certified valuation analyst, to obtain an official value that can be used as a starting point in setting a sales price. Depending on the appraisal method, the valuation can differ widely. The valuation approach used in any particular case depends on the valuation specialist’s preferences, as well as your business’ situation, but it is usually one or a combination of the following:
- Income approach: A multiplier approach that takes into account past current and projected revenues and cash flow in the same market
- Asset approach: Only considers the fair market value of the assets owned by the business
The Art of Valuing a Business
The science, or math, of business valuation is fairly straightforward. It's the art - the valuation of the variables and intangibles - that is somewhat more subjective and makes pricing a business for sale difficult. It's about many of the factors discussed earlier that, at any given moment, can be perceived by a buyer differently than another buyer at a different moment in time. The key is to understand how each of these elements can impact the value of the business and then take steps to optimize them for a business sale.
Don't Wait to Value Your Business
Even if your planned exit date is far off in the future, you shouldn't wait to have your business valued. If nothing else, it will provide you with an important benchmark that allows you to keep score. But, there are plenty of other reasons to value a business. You can’t properly fund an estate plan or a business continuation plan without knowing the value of your business. If you are considering the sale of your business, by valuing your business today, you will know more precisely what aspects of your business you need to work on to increase its value and its ultimate sale price.