How to Value a Business
We passionately believe that every business owner should know the market value of their business. For most business owners, the sale of their business is their retirement fund. It's essential for all business owners to build a business of value that sells for maximum price when they are ready to sell it. It's never too early in the journey of business ownership to know this vital information. Understanding how a business is valued can help business owners make the strategic decisions necessary to ensure when it is time to sell, they've created maximum value. Our Business Brokers help business owners understand:
When you're considering what someone would pay for your business there are three main considerations. What you want to sell your business for, what the market will bear, and what lenders will finance. All three of these have to work together so that when your business is listed you attract buyers and are able to close the deal.
1. What You Want to Sell Your Business For:
Obviously, you want to sell your business for the highest price possible. However, it's important to understand that what you want to sell your business for isn't always what the market will bear, or lenders will finance. Identifying your walk-away number, the net proceeds amount you desire, is essential to designing your business to provide you with that amount upon sale.
Our Business Brokers will assist you in analyzing the dynamics of your business in relationship to your walk-away number to identify if there are gaps between what you want and what the market will bear. Considerations such as how much risk you want to carry and how long you may need to be around for the transition will also factor into the price.
2. What the Market Will Bear:
Buyers look at your business differently than you do as the owner. As the owner, you consider the time, money, and effort that you've put into growing the business. Buyers focus on what they can do with the business going forward. They don't look at the past, except to forecast what the business will do in the future. They are investing their money into the business and expect to achieve a return on their investment after the bank is paid.
Our Business Brokers take the time to learn about you and your business to ensure qualified buyers understand the attributes and opportunities not reflected in financials. Areas such as assets, cash flow, track record, customer base and growth prospects will all be used to determine a price that is reflective of what we feel the market will pay.
3. What Lenders Will Finance:
Lenders are often the final judges in determining what a buyer can pay for your business. Imagine listing your business for sale and finding someone that wants to buy it for your listing price, but no bank will finance the deal. Lenders are protecting their interest, which doesn't always align with what you or the buyer want.
Our Business Brokers understand how lenders assess risk and work with qualified buyers to prepare professional loan application packages. We work with all parties to structure a deal that will be mutually beneficial and allow the deal to close.
To arrive at a realistic listing price for your business our Business Brokers are trained to use several evaluation methods. We use a combination of these that allow us to test our assumptions, "sanity check" each conclusion, and calculate a realistic Opinion of Value. We work hard to provide you a realistic listing price that will attract buyers, get your business sold and maximize your profits.
A critical tool we use as a foundation for approaching an evaluation of your business is the Value Builder Assessment. This was made famous by John Warrillow, author of Built to Sell. Using the 8 Key Drivers of business salability and value, this assessment allows us to easily explain why your business is worth the suggested listing price.
Methods that we use in calculating the valuation of your business include:
- Market Method – Makes a determination of how much discretionary net cash flow would be available to a buyer, then applies a multiplier to determine a likely value. The multiplier generally ranges from 1 to 5, sometimes higher, and is selected based on a number of factors and brokerage industry data.
- Multiple of Earnings Method – Evaluates several weighted values of attributes that make your business more or less valuable, such as historical profits, income risk, location, marketability, and so on. Such weighted values also produce a multiplier, which is added to a “Size Premium” determined through a nationally recognized database for each business category. The result produces yet another overall value to be compared to the Market Method.
- Buyer’s Test Method – Provides a test that simulates underwriting by a buyer’s lender, assuming a certain loan-to-value ratio, needed capital expense, an owner’s salary, debt service, a debt-service-coverage ratio, loan period, interest rate, and a required rate of return on investment. The value produced is further compared and weighted with the other methods. While this method tests for the buyer’s ability to service a loan, it is also a good indication of “bankability” by a lender at the suggested listing price.
Our history of selling businesses clearly shows that our methods establish a business value for which business owners are willing to sell, which attract buyers, and can be financed by lenders on behalf of buyers.
There are 8 Key Drivers of Business Value. Knowing what they are is essential to realizing maximum value from your business.
- Financial Performance: Your history of producing revenue and profit combined with the professionalism of your record keeping.
- Growth Potential: Your likelihood to grow your business in the future and at what rate.
- The Switzerland Structure: How dependent your business is on any one employee, customer or supplier.
- Valuation Teeter Totter: How well cash flows through your business.
- Recurring Revenue: The proportion and quality of automatic, annuity-based revenue you collect each month.
- Monopoly Control: How well differentiated your business is from competitors in your industry.
- Customer Satisfaction: The likelihood that your customers will re-purchase and also refer you
- Hub & Spoke: How your business would perform if you were unexpectedly unable to work for a period of three months.
It’s never too early to understand what drives your ability to sell your business for maximum value. The good news is, whether you are looking to sell in the near, or distant future, you can influence these drivers to increase the value of your business. To learn more click on the button that fits your current goal.