Business owners often want to sell their business but have no idea how much they can expect to sell it for. If you’re genuinely looking to sell your business, it’s important to understand that a business buyer is looking for clear and objective facts that will give them the confidence that your business will be a solid and profitable investment going forward.
We are here to help you understand a fact-based approach to business value. Following are six primary areas that are important to help the valuation company quickly assess the value. This preparation is important. Here are six key areas to begin to focus on making the valuation process to go well.
Since no two businesses are alike, it is crucial to have a third party that will objectively look at your business as a whole. Financial performance, employees, operation systems and other proprietary characteristics will objectively determine the true value of your company.
1. Prepare Your Financials
The step to discovering the correct value for your business begins with preparing the company’s financial statements. Make sure that your books are current including that all expenses and income are entered correctly.
A quality business valuation and the business purchaser will need to see the financial records for the past three to four years including a Profit and Loss (on an accrual basis), a balance sheet and a “go away” expense list (more about this below).
2. Determine the Asset Value of Your Business
One of the tricky parts of the business valuation process is to determine the value of your assets. Sometimes it is necessary to have an equipment appraiser and other times it is less difficult to decide on. First, you must estimate the replacement value of the company’s tangible assets. The replacement value is the cost that someone would pay to purchase that asset in the same condition sitting in the same place.
Assigning the value to intangible assets like patents and trademarks can be tricky, and it may be best to consult with a business broker or professional appraiser. Most intangible assets are valued as part of the “goodwill” or “blue sky” of the business. This means that the value of these intangibles comes primarily from the profit that those intangibles provide the company. This means that the intangibles may not be valued separately from the business as an asset.
While asset valuation gives you a clearer picture of the book value of your business, it does fail to reflect the value of your company as an on-going operation and earning potential.
3. Determine Your SDE and “Go Away” Expense List
Next, work with a business broker or accountant to convert your income statement into a Seller’s Discretionary Earnings (SDE) statement, which takes into account non-recurring purchases and discretionary expenses. We also call these discretionary expenses “Go-Away” expenses, meaning that any expense that will no longer be there when you leave. I encourage business owners to open their Quickbooks and look at the general ledger for the last 3 to 4 years. This can be a daunting task, but it can often result in tens of thousands of dollars in your pocket. This scavenger hunt is merely looking for expenses that the company paid and deducted from its tax return, but if you were not the owner, then the expense wouldn’t have been incurred. Examples of this include, family cell phones, home expenses, auto expenses for a vehicle not used in the business, etc.
4. Key Ways to Improve the Value of Your Business
Most business owners in America are trying to minimize the amount of income taxes that are paid. The typical businesses that we work with are making more profit than what they are reporting on the tax return. In the process of selling a business, you will make $2 to $5 for every $1 in profit that you show on the tax return. Some key areas to improve the value of your company is to go back and show the actual profit that you made. While it may increase your income tax, it will undoubtedly increase your value at a much more significant rate. The reason is your tax rate will be 20 (twenty cents) to .49 (forty-nine cents) for each dollar and as we said above when selling the business you will make $2 to $5. This is a $1.50 to $4.80 increase in your money. Most business owners take this option when they realize that they can do a little work and make a significant profit. We can also show you how to make sure you are going to make that profit BEFORE you pay the tax.
5. Operation Documentation
Buyers are looking for a smooth transition into their new business, so evidence that your business is well organized and running smoothly will also add to your company’s value. Presenting your business as a clean and well-oiled machine with a neat, organized package of records detailing operating will help the valuation and sale process:
- Copy of the current lease
- Insurance policies
- Professional certificates
- Supplier and distributor contracts
- Employment agreements
- Financing agreements in place.
- Standard operating procedures,
- Compliance with health and safety regulations,
- Employee policies,
- Supplier lists
This list is not intended to overwhelm you but rather to help you genuinely reflect the value of your company.
6. Consult With a Professional Appraiser and Get a Formal Valuation
Hiring a professional business appraiser not only allows you to benefit from his or her expertise, but it also provides the objectivity that you may lack when it comes to your business. Many brokers are experienced at conducting a formal valuation or have connections with qualified professionals. Correctly valuing your company is essential in a competitive market, and enlisting the help of a third party professional will not only eliminate seller sentiment from the sales process, but it will also shorten it by aligning the business value with up-to-date market conditions.