Placing a realistic value on your company is one of the most important aspects in selling a business. Business valuation is an extremely subjective process. And while many business owners tend to inflate the value of their company, the real value will always be determined by the marketplace.
Some of the many factors that come into play when valuing a business include:
- the historical financial statements (usually the last 3 to 5 years) and corporate tax returns;
- the book value or current market value of net assets in the business, and
- value placed on the going concern such as: the employees, the service or product provided, customer lists and systems in place.
Other elements that may be considered in valuing your business are:
- the number of years the company has operated;
- the amount of competition and marketability;
- the availability of financing options for the buyer, and
- the state of the current economy–how many qualified, available investors or purchasers are out there, compared to the number of available businesses for sale in the category.
One of the keys to maximizing a business’s value involves proper planning and preparation, an important step that is too often ignored.
Business Value Vs Selling Price
When the owner of a business asks: “What is my business worth?”, do they mean what is the value of my business, or… what will my business sell for? In most cases, the seller is asking what price will my business most probably sell for on the open market.
Value and price are different. There is often a big difference between the value of a business and what it will actually sell for. So, what is it that creates this difference between the value of a business and the price? The easy answer is perceived value. In other words, what is the business really worth to the buyer? This figure is the value of the business as perceived by the buyer and subsequently, the price they will pay, in other words, the selling price.
Ways to Increase the Value of Your Business
Unfortunately, sellers often ignore one very simple truth: The value of their business increases in direct proportion to the buyers’ decrease in risk. I think this is a very important element of valuation and, as such, should be very well understood by those looking to sell or currently selling their businesses. The less risk the more value you may be able to get for your business buyers will compete with price to get at your business.
Intuitively the value of a business should reflect its attractiveness and the generation of profits or dividends for its owners.
So, let us discuss some of the things that will make your business more valuable and less of a risk to buyers:
- Increasing Sales and Profits. This is an indication that the business continues to grow, and as such is able to increase greater profitability in the future.
- Cash Flow. Cash flow refers to the operating profit generated over and above any wages or salaries that should be paid to the owner. If the owner is working in the business, then they should receive a wage for their efforts. But the business should also generate a cash flow in addition to this wage. The cash flow can be adjusted to remove the effects of one-off expenses or revenue or non-operating items. The higher the cash flow, the higher the business valuation.
- Transferability. No one wants to buy a business that they can’t operate. If it relies on the owner to bring in the customers, service them and manage the business, there is a big question as to whether it can be transferred to someone else. For example, many professional services businesses exist because of the relationship with the owners. If these relationships cannot be transferred, there is little or no value in the business.
- Accurate Financial Statements. The due diligence process is key to most buyers and understanding the financials of the company they intend on buying is highly important. The less cumbersome it is to understand the company’s financials, the less risky it becomes to the buyer and more value it creates.
- Accurate Tax Returns. Cheating on your taxes may give you an immediate tax benefit, but it will hurt you in terms of getting the right value for your business in the long term.
- SBA Financing. Does this business qualify for an SBA loan? If it does, there is further confirmation to the buyer that the business has a solid backbone and the ability to pay back debt service on the loan and a provision for the buyer’s life style and earning requirements.
- Seller Financing. If the seller is willing to provide financing, the buyer trusts in the business ability to generate sufficient cash to pay back the debt and meet his personal financial requirements.
- Solid Management in place. The less dependent a business is on the owner the better.
The valuation should be performed with a typical buyer or range of buyers in mind. After all, it is the buyer that ultimately decides the value of your business. The value is never known until the buyer gives you a cheque and the funds have cleared in your account. Until this point the value can only ever be estimated within a certain range.
Obviously, a business which addresses the above points will get significantly more value and price than those who do not. So, don’t wait and start now. Make sure that your business prepares for and builds on its value by managing your business and applying these practices, accordingly.
4 Things You Must Know Before Attempting to Sell Your Business
Did you know that your business is an Illiquid asset? And that most of your wealth is tied up in this business? If you are within 5-10 years of retirement, how do you plan on exiting from your business while preserving your wealth and maintaining your lifestyle?
You must ask yourself these four questions:
- Is my business salable or what can I do to improve the saleability of my business?
If you were to put your business on the market today – would you get an asking price that you could live with? If not, what can you start to do now to improve saleability? Is the business turn-key? Are company policies and procedures documented to provide for a smooth transition for a new owner? These are just some of the questions that you must ask yourself.
- What is my business worth?
You might have a figure in your head -but this figure is often based on emotional factors. One way to get a good third-party opinion is to hire an expert experienced in business valuations.
- How can I exit from my business and maintain my current lifestyle?
Your business provides for you and your family. It pays your bills, your living expenses, your medical needs and it funds your retirement. If you are contemplating an exit from your business – whether you plan to retire or just transition into another income producing venture – you have to know how much money you will need to maintain your lifestyle.
- What are the tax implications of selling my business?
A business owner must know that the sale of their business will result in a taxable transaction. However, depending upon how the sale is classified – asset sale or stock sale – as well as the business structure, the tax consequences can vary. By talking to your tax advisor early in the process, you can structure a plan to minimize the effects of the tax liability due upon the business exit.
