When the time to sell your business has come, it is crucial to have an accurate valuation of your business. The valuation will take into account factors such as assets, monthly profit, industry growth, employee size, and other data points.
Business valuation also helps ensure that you don’t leave money on the table and that you don’t scare away investors with unrealistic prices. Before giving an estimation, be sure to go through your business and its financials.
The value of your business should be more than the total value of its assets. After all, a buyer believes that an ongoing company has everything needed for successful operation such as equipment, experienced employees, business processes, inventory if applicable, a customer list, location, and in the required amounts.
These intangible assets are commonly known as going concern-value or goodwill. But how do you know the market value of going value-concern or goodwill? In fact, how do you put a price on hard assets used in your company? – By making a business appraiser part of your selling process.
Many company founders aren’t willing to spend money or time to have an appraisal done. But trying to cut costs on the assessment can be a costly mistake. Guessing the value of your business can result in an unrealistically high price that can turn away potential buyers. It can also cause you to underprice your business. WallStreet Prep suggests consulting an investment bank as one of their functions is the valuation and mediation between the selling and buying parties.
Here are some reasons why business valuation is critical when selling a business:
Generally, business appraisers are certified public accountants who are trained and experienced in business appraisal strategies. In their profession, they have established several ways to quantify the various aspects of businesses and come with an overall figure.
As part of the valuation process, they will give you a written report which explains how they got the final value. And because an outside professional prepares this document, it will make your asking price more credible as the buyer can see how you arrived at your final price.
Remember, if you are selling a larger company, you might deal with MBAs who usually requires a sophisticated financial analysis. A detailed appraisal will make MBAs comfortable going through with the sale and will be pleased with your managerial abilities.
Helps in Setting the Listing Price
Once the appraiser has given an estimate for your business, you’ll now use it to set your asking price. You can set it slightly above the range price to allow room for negotiations and still get the full value of the company. Or if you want to make your sale very quickly, you can set your asking price close to the appraised value or even less.
You should think about this carefully and base your decision on your priorities and also your business broker’s experience. Of course, you’ll arrive at your actual selling price after negotiating with the buyer, mostly after considering all significant factors.
To arrive at your listing price, you should consider:
· The most important factors for buyers
· How you can improve these factors before the sale
· Is there a way to adjust your financial records before revealing them to buyers?
· What formulas and methods are used to arrive at the listing price
Some business brokers choose not to have a listing price at all. Instead, they have a controlled auction where they contact many potential buyers and give them essential information regarding your business and solicit bids. Through this, they can achieve a quick sale at a reasonable price, provided the market for your business type is relatively good.
Buyers Focus On Cash Flow
Buyers are more interested in earnings and cash flow when buying a business. They want to know that your business will give them a steady stream of income. Some buyers will focus on your cash flow statement, while others will look at your income statement in examining your earnings before interest and taxes. Still, others will focus more on earnings before interest, taxes, and depreciation.
Whichever the case, you should be able to prove the size and the flow of income, by providing at least three years’ of audited financial records.
Buyers Will Need to See Documented Business Assets and Financials
Potential buyers will demand to see the documents available for your business. They’d want to see what documentation says about due diligence, as you’re going on with negotiations. Having documentation such as production reports, sales reports, job descriptions, employee organization charts, and operation manuals will say a lot about your business and also increase buyers’ satisfaction with the level of your managerial style.