Selling your business is a significant decision that requires careful planning and preparation. It's not just about finding a buyer and negotiating the price; it involves understanding the worth of your business, which can be complex. This article will guide you through the process of valuing your small business before selling it, ensuring you get the best possible deal.
Getting a business ready for sale can have many parallels to putting your house on the market. Before you go live you choose your real estate agent, take a look at compatibles in the neighbourhood and then prepare your house so that it looks the best it possibly can.
Understanding Business Valuation
Business valuation is a process that determines the economic value of a company. It's an essential step when selling your business as it helps set a fair and realistic asking price kind of like the market study of comparables when selling your house. A proper valuation considers various factors, including financial performance, market conditions, assets, and potential for future growth. It also looks at things like how reliant is the business on you, the owner and are you overly reliant on one supplier, customer or employee.
There are several methods for valuing a small business, such as income-based, market-based, or asset-based approaches. Each has its merits and drawbacks, so it’s crucial to choose the one that best suits your specific situation. Other things to consider is whether you are doing a share sale or an asset sale. If the end goal is to minimize your taxation on the price received, the type of sale you negotiate can have a large impact on that.
1. Financial Performance
Your company's financial performance is one of the most critical factors in determining its value. Potential buyers will want to see consistent revenue streams and profitability over time. If you think about your buyers, they are also looking for predictability and certainty. Part of the process involves "normalizing" the financials. If you are paying above or below market rent for your facilities, if you are paying yourself dividends instead of a salary and if you are running some individual expenses through the company, you will want to ensure that you have these calculated so that the financials can be adjusted to show what the buyer would "normally" pay if you are out of the picture.
2. Market Conditions
The current state of the market can significantly impact your business's value. If businesses similar to yours are selling for high prices or if there's high demand for companies in your industry, this could increase your valuation. In recent years, there have been lots of merger and acquisition activities in particular industries like veterinarians and psychology practices. Knowing that this may be happening in your industry helps you understand the buyer motivation and then conducting thorough market research will help you understand where you stand compared to other businesses in your sector. This information can be invaluable when setting an asking price for selling your business.
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3. Assets
The assets owned by a company also contribute significantly to its value. These include tangible assets like property, equipment, inventory and intangible ones like brand reputation, customer base or patents.
When preparing for sale, take stock of all assets owned by the company and assess their current market value. Intangible assets like intellectual property are often undervalued by sellers - however a lot of times they are way more valuable as they can include proprietary methods, packaging and product information. This can be way more than "goodwill".
4. Future Growth Potential
Buyers aren't just interested in what a company is worth now; they're investing in its future potential too. If you can demonstrate strong prospects for future growth – whether through expansion plans or untapped markets – this could significantly boost your valuation. Showing a consistent pattern of growth in profit and sales can be a major factor in business value.
Consider creating a comprehensive growth plan outlining how the buyer could increase profits after purchasing the company. This document can serve as an attractive selling point when negotiating with potential buyers.
Remember that valuing and selling a small business isn't an exact science; much like selling a house it involves making educated estimates based on available data and industry trends. It involves understanding the 8 levers of value that go beyond the numbers and assembling a team of professionals who have been involved in the purchase and sale of similar size entities. (this is not the time to use the lawyer who helped you with your wills or last property).
A final consideration - as a business owner, your business has probably been a huge part of your life. Ensuring that you have plans and interests that will be equally as engaging and rewarding when you have completed the sale will make sure that you don't miss the business too much!
