Know your company's value before you go to market. Determining the value of your business is a critical first step to your business exit strategy.
Determining Your Business’s Market Value
Selling Your Business? Know its Value.
How to Value a Business to Buy or Sell
If you are a business owner, you have likely considered the possibility of selling your business. Increased demand for business ownership has put selling prices at a premium. This, coupled with a desire from many entrepreneurs to pursue new opportunities or retire, may be enough to encourage a sale.
Although many entrepreneurs are well versed in their business accounting, bookkeeping, and financial information, they fail to realize that these skills do not necessarily help accurately determine a sale price.
This is because, often, the sale price is based on “perceived need,” or how much money the business owner needs at the moment of initiating the sale. The problem with this approach is that the price set by the owner is often inflated and fails to consider the true value of the business. An inflated asking price will not only result in a slower sale process but also lead to disappointment in response.
To prevent this, you, as a business owner, need to commit to entering the sale process with as accurate a picture of what the market is willing to pay and where your asking price fits into that. You should also strive to obtain an effective asking price for your business that not only reflects its true value but the potential for growth within the landscape of the local market and industry.
One way to do this is to consult professional business appraisers, like those at Business Appraisal FL|GA (BA F|G), to accurately assess your business’ value and potential sale price using numerous business valuation methods. Doing so will ensure that you solicit objectivity and fairness when assessing the value of your enterprise, which will eliminate any sentiment that would have otherwise influenced the selling price.
As a business owner, you will definitely want to gather the financial records of your business for the past few years to prepare for an upcoming valuation. These records include an income statement, a cash flow statement, and a balance sheet.
An accountant can help you to transform the income statement into a seller’s discretionary earnings (SDE) statement, which will reflect the profit earned before tax and business owner benefits. Together, this with the business appraisal will offer insight into the true value of your business, which will be needed to effectively obtain your business’ potential selling price.
Valuation methods to appraise your business’s worth
To obtain the true value of your business, appraisal experts like those at BA F | G will employ Six Valuation Methods.
1. Asset Valuation
This method, although imperfect, determines the value of a business by taking the difference between the company’s total assets and total liabilities. To begin, make a list of everything the business owns. This may include physical items like machinery, property, and raw materials, and intangible items like intellectual property. Next, assign a monetary value to each asset. Sum up each asset’s value before subtracting any debts or liabilities from this number.
The valuation that this approach yields is likely a lot lower than the business’ true worth because it fails to consider expected revenue and earnings. Regardless, it is a great starting point for appraising a business.
2. Market Approach
This approach determines the value of a business by considering the market prices of similar assets or businesses that have been recently sold or are in the process of selling. It also considers the value of your business based on geographical location and area. It is especially helpful if you are interested in determining what particular asset, or business, should be purchased or sold for within your local market.
Publicly available data regarding company comparables and transactions tend to be utilized for this method. Adjustments should be made for different quantities, qualities, or sizes when comparing assets.
3. Price-To-Earnings Ratio (P/E)
The P/E ratio, or multiples of profit, is a method often used to evaluate the worth of businesses with an established record of annual earnings.
Through this method, expert valuators use prior profits to inform forecasted return growth. A higher P/E ratio would be used for companies with high forecasted return growth or repeat earnings. For example, if the P/E ratio of three is used for a company that makes $500,000 in post-tax earnings, then the enterprise would be valued at $1,500,000.
Although the calculations used to reach the valuation are straightforward, expert valuators like BA F|G can suggest the correct number for your P/E ratio. This is because the P/E ratio often varies from business to business.
Startups, for example, often have high ratios because they are high-growth companies. More established companies, on the other hand, like auto shops or local insurance agencies, experience less drastic growth and will likely have a lower P/E ratio.
Business Valuation Pre-Sale Conclusion
Selling a business is an important step that many business owners decide to take for themselves. Determining a fair and accurate selling price of the enterprise is a vital component of the sale process. Know your company’s value before you go to market.
Reach out to BA F|G today to discuss your situation and set yourself up to confidently engage with potential buyers for your business, knowing your company’s value.