The process of buying or selling a home or car involves an understanding of what the asset is worth. Without this information, how will you know whether you are paying too much or asking too little?
With vehicles there are valuation sources that make the job a lot easier. Based on the condition of the vehicle, mileage and options, it’s pretty easy to determine what the vehicle should be worth in the marketplace. Housing is a bit more complicated, typically using comparable transactions to establish an expectation for what the home should be worth.
While there are exceptions to these approaches, they are generally accepted practices.
But what happens when you want to sell your business? How do you place a value on it? What will the market bear and it is in line with the real value?
There is no blue book for businesses! There may be some commonalities across businesses of a certain type, but the reality is that every business is different, with a variety of scenarios that could positively or negatively impact the value. If you own a business and your exit strategy is to sell it, then it is crucial that you have an appreciation for how value is determined so that you can prepare accordingly and maximize your value.
For many small business owners, the process of placing a value on their hard work over a period of years can be more emotional than objective. The result can be an inflated, unrealistic expectation regarding the value, and more often than not a potential buyer does not share that view! In reality, a business is only worth what someone is willing to pay for it, regardless of your feelings to the contrary.
Valuing a business involves a number of factors and variables, and requires objectivity and expertise to generate a realistic number. While there is no one right way, there are a number of ways to do wrong, so it is important to work with your professional advisors throughout the process. A certified evaluation expert is a must, along with your CPA, business attorney, and of course your business coach!
There are a number of acceptable valuation methods that can be used, and often a combination of several methods is used to get a truer picture of the value. An asset-based valuation method totals up the value of the company’s assets as a way to assign overall value. This can be effective if the goal is to simply liquidate the parts of the business, with the assumption that the business will cease being an ongoing, revenue-producing concern.
The earnings multiplier method is often used with regard to a business with continuing operations. This method helps take into account the future earnings potential of the business, for that is real value to a purchaser. This method bases value on a multiple of the earning potential, with the multiplier varying by industry, business type, risk involved, and other factors. Some businesses are simply worth more than others, for their earnings potential is larger, more stable, and more competitively attractive. Coming to an agreement of what future earnings potential could be can be a challenge, which is where a qualified business broker and valuator will be valuable. A broker will utilize data from similar recent transactions to gauge what is happening in the marketplace
There are steps you can take to enhance the value of your business in preparation for a potential sale. The steps you will take to improve your business profitability, organization, brand, leadership team, products and services, and your reputation in the marketplace all contribute to the business value. All these steps help remove risk and improve stability and predictability, and in business, that is golden! Who would want a business that is poorly run, has bad products, a negative reputation, and weak leadership? For that matter, you wouldn’t either, so taking steps to create a healthier business in an investment in your financial future.
Start sooner rather than later, for some of these efforts take months or even years to implement and see their impact on the value of your business.
Warren Williams is president and founder of Turning Point Business Coaching. He provides coaching to growing businesses in Concord and the Greater Charlotte area. Have a question about this article, or a topic you’d like to see covered here? Contact Warren at email@example.com or visit www.TurningPointBizCoach.com.