What is Your Business Worth?
Most business owners only sell one business in their lifetime, and normally, it is the business they have spent their lifetime growing and shaping. When it comes time for them to look at moving on to the next step in their life, most business owners have the same question, “How or where do I begin?”
The first step when considering selling your business is to figure out just how much your business is worth. The advisor will help you obtain that valuation giving you an objective price range you can expect to receive from the marketplace.
In order to complete the valuation the advisor will need financial documentation of the business’s history and current financial trending. These include 3-5 years of tax returns and financials, year-to-date financials, equipment lists, lease agreement and a deep understand of your business model.
The business intermediary will recast your financials to show your business’ actual financial performance and income-generating ability known as Owner Benefit. This is needed since your profits on financial statements and tax returns are minimized to decrease the amount of your business’ income taxes. In addition, the intermediary will have access to a vast amount of historical data for similar businesses that have actually sold. Much more reliable than the stories of 10X EBITDA or rule of thumb told by someone at the last social event you attended.
While examining these documents, the business intermediary will ask a series of questions to help you determine which of the expenses may have been not necessary, non-discretionary, or one-time/nonrecurring. These are expenses the new owner would not have and could be added to the true discretionary cash flow.
A valuation is an honest, unbiased look at where your business is in the business cycle and its marketability. The valuation estimate will help you decide if you are ready to sell or what you may need to do to get it ready to sell.
Besides your business financials, there are other factors that are examined in establishing your company’s value. These include location, competition, regional demand factors, lease terms, type of buyer, supplier relationships, scalability of business model, profit margins, revenue concentration and recurring revenue.
The greatest factor in the valuation is often the quantity and reliability of the cash flow your business has generated. Buyers will most often formulate their purchase price based upon the historical financial performance, but the reason for their acquisition is the future potential they see in your business.
A recent IBBA (International Business Broker Association) study indicated that 75% of business owners don’t know how much their business is actually worth. Too many business owners are forced to sell because of an unexpected event or crisis and do not receive the optimal price and terms. The best way to avoid this fate is to develop a comprehensive exit plan well in advance, understand the present market value, implement growth strategies that increase the business value and sell your business when the timing is right not when a crisis strikes. You have your blood pressure checked regularly to ensure it’s within a safe range. A business valuation service as the “blood pressure check” to make sure your business is on track to deliver the net worth you will need to exit successfully.