- Align business value with market expectations to avoid overpricing or underpricing.
- Use comparisons, asset analysis, and market insights for pricing.
- Consider financials, market trends, assets, and growth potential for valuation.
- Engage experts for accurate valuations and sales process navigation.
- Apply cash flow multiples or liquidation value to set the price.
Selling a business is an entrepreneurial dream. After years of tears and sweat in growing a business to become an empire, exiting is always the natural progression. Nevertheless, determining the right buyers, let alone the best price for the exit, takes work.
While there is always the possibility of asking too much for the business, the risk of turning off potential buyers is always high. Similarly, going for a much lower asking price won’t make any financial sense. Therefore, finding a balance between the business’s worth and what the market is likely to pay is crucial.
Objective valuation methods should always trump any emotion when determining the asking price of the business. It’s the only way to avert the risk of asking too much that ends up alienating potential buyers or too low, resulting in losses.
One of the simplest ways of determining the ideal selling price of a business entails finding out what comparable companies in the exact location are going for. Analyzing the value of the business assets and liabilities can also make it easy to determine the best-selling price.
Selling your business is a legacy handover where emotional value and market worth align to reflect your entrepreneurial journey.
Let’s explore in detail the process of determining the optimal selling price for your business.
Key Factors Influencing Business Valuation
If you want to sell your business, you should consider the following factors when trying to value your business.
Financial Performance
Revenues and profitability are some of the most important metrics for determining the actual value of a business. A business with a robust sales trajectory and stable earnings will always command a higher valuation than other businesses. Similarly, the business should be able to generate revenue and retain most of it for growth to command a higher valuation that potential buyers agree to.
Buyers pay close attention to revenue and earnings growth as an indicator of business sustainability and reduced financial risk. Therefore, a business’s final selling price should consider the company’s run rate on revenue and earnings growth.
Market Trends and Industry Conditions
Very few businesses operate in isolation; therefore, they are subject to prevailing marketing conditions and competitive posture. When valuing a business, it is essential to analyze the external environment, focusing on competitors, market dynamics, and industry-specific trends.
It’s vital to ascertain how similar businesses in the exact location are valued to understand what one is likely to fetch from the market. Likewise, you should investigate how many similar businesses in your sector are on the market to determine the right time for you to sell.
The state of the economy, interest rates, and demand levels are other important factors to consider. Considering all these factors, an owner looking to sell a business can strategically position themselves by determining the best price depending on the prevailing conditions.
Tangible and Intangible Assets
Every business valuation will always boil down to the value of its tangible and intangible assets and liabilities. A business will likely command a higher valuation if it owns more tangible and intangible assets like machinery, real estate, intellectual property, and goodwill. Nevertheless, these assets are often offset by liabilities, including debts and obligations, which should always be low.
Before going to market, business owners should balance assets and liabilities to attract bids commensurate with years of investment and hard work.
Potential for Future Earnings
While a business’s past and present performance are vital in determining its valuation, its long-term revenue and earnings growth prospects are equally important. Therefore, while valuing a business, it is first essential to analyze its potential to expand and conquer new markets.
Businesses with solid growth prospects and opportunities backed by proven avenues for expansion and innovation always command a higher valuation than their peers. Therefore, while valuing a business, it is vital to explore its growth opportunities, scalability, and market positioning.
Common Business Valuation Methods
Determining the business’s fair market value can be complex, given the factors one must consider. Nevertheless, some methods simplify the process by providing valuable insight into a business’s financial standing.
Income Approach
The Income approach for business valuation pays close attention to the earnings a business generates and is likely to develop in the future. Given that a company’s earnings are a more reliable indicator of future financial success, the valuation method tends to provide an accurate picture of the actual value.
The income approach focuses on adjusting future profits against cash flow that can be invested at the prevailing interest rates. Likewise, the method is based on future cash flow projections that can be adjusted to get the current market value.
The income approach is an ideal valuation method for businesses whose income is not expected to remain consistent. The method stands out as it forces one to consider key inputs, including discount rates, future cash flows, and growth rates. Its biggest downside is that it can be easily manipulated and relies heavily on input variables and forecasts.
Market Approach
It is the most subjective valuation method that ascertains the value of a business by comparing it to similar businesses that have sold. It is one of the most effective methods whenever businesses can access sufficient data about similar businesses sold in the same locality. Gathering this information makes it much easier to determine a price range for the business up for sale while factoring in the market trends, assets, and liabilities.
While it is a simple valuation method, given that the final price is based on what other businesses were sold, the process might result in an inaccurate valuation. Therefore, you might be forced to resort to a more calculated approach.
Asset Based Valuation
It is a more objective valuation method for determining a business’s worth. The bottom-up approach believes that the final value is based on the sum of all parts of the business rather than focusing on other businesses’ cash flow or comparable sales.
The method focuses on the actual components of the business, such as tangible and intangible assets. In this case, the process considers the total net asset value of tangible and intangible assets minus the total liabilities.
Asset-based valuation is an effective valuation method for businesses with multiple divisions or geographies with significant assets. Nevertheless, it tends to be complicated to calculate.
Seeking Professional Assistance
While it’s essential to understand the various business valuation methods, seeking professional advice is the way to go for a seamless process. Working with professionals makes it easy to cover all the abuses and consider all the factors to value the business accurately. While working with a professional, emotions are unlikely to take over, consequently affecting the ability to establish an accurate and defensible valuation.
Working with a professional in the sales process goes beyond finding how much a business is worth. When done well, you can develop a strategy that ensures a more profitable and successful exit in the sale process.
With many options available for professional advice, you need to choose a valuation expert with the right experience for your type of business. It’s also essential to work with a professional who understands your company’s value and can assist you in navigating the entire exit process.
With many options available for professional advice, you need to choose a valuation expert with the right experience for your type of business. It’s also essential to work with a professional who understands your company’s value and can assist you in navigating the entire exit process.
Determining the Selling Price of a Business
Determining the selling price of a business that entices and attracts potential buyers takes work. While a seller would always want to sell for as much as possible, buyers, on their part, would always want to pay as little as possible.
Nevertheless, the selling price can be determined using various methods. The rule of thumb is a quick calculation method that entails setting the price as the annual positive cash flow multiplied by four. On the other hand, you can resort to the liquidation value method, which indicates the value of the business, should the owner decide to close the shop and sell all the assets in less than 12 months. The total liabilities are deducted from the business’ assets in this case.
Finally, hiring a professional to conduct the valuation offers one of the best ways to settle on a more accurate and defensible selling process. Professionals have a good feel of the industry, market trends, and business fundamentals and can develop a more accurate valuation.
Case Studies/Real World Examples
Brown’s Green is a well-known café specializing in vegetarian cuisine in the center of Rawdon in Leeds. The owner had cultivated the café’s reputation over time, and with the local community’s backing, the business flourished. Finding the perfect buyer became a top priority when the owner decided to sell the business and pass it on to new owners.
The sale process began with the owner engaging a professional evaluator’s services to ascertain the business’s true worth. All tangible and intangible assets were evaluated to determine their actual worth, and liabilities were deducted afterward. The expert valuator arrived at a price that the owner agreed to.
As a result of the business’s popularity in a fantastic location, there was a high level of interest, leading to a successful sale to buyers who embraced the former owner’s commitment to offering exclusively vegetarian/vegan cuisine made with high-quality, locally sourced ingredients.
FAQs
Valuing a business is not an exact science but a process that requires experience, industry knowledge, and the ability to analyze various factors. Value is determined by analyzing growth potential, cash flow, financial history, market trends, and industry trends.
It is highly recommended to seek professional advice when selling a business. Professionals can accurately value the business and, therefore, come up with a price that is accurate and attractive to potential buyers. Additionally, professionals would provide insights on managing risks associated with the sale.
The appropriate time to sell a business depends on personal preferences and objectives. Nevertheless, selling only when the business is doing well is advisable, as it increases the prospects of generating significant returns.
Yes, one must consider a range of tax implications when selling a business. The tax implications depend on the nature of the business, the sale structure, and the value. For instance, one must pay a capital gain tax if the final sell price exceeds the original cost of the business assets.
The business selling process depends on various factors not limited to market conditions and what is for sale. In most cases, it can take five to eight months to complete the entire process.
Conclusion
There is no doubt that selling a business is a complex process characterized by many challenges. Whether it is struggling to settle on the correct price or finding the right buyer, you may also face the risk of a breach of confidentiality in the sale process. However, you can limit these risks by taking the proper steps and preparing adequately. The sale of every business will always be unique, but the fundamental process will always be the same. Everything starts with settling on a price that does not undervalue the company but does not spook potential buyers as well.
Still struggling to know the worth of your business, let alone the best price to sell the business? Worry no more, as the team of professionals at Acquira is more than ready and able to take you through the evaluation process and determine the best price and right buyers for your business.
Key Takeaways
- Financial performance, market trends, and industry conditions are considered when evaluating a business’s worth.
- The income approach, market approach, and asset-based valuation are the most popular methods used in evaluating a business’s worth.
- Seeking professional advice is crucial when trying to sell a business for a smooth and stress-free process.
Acquira specializes in seamless business succession and acquisition. We guide entrepreneurs in acquiring businesses and investing in their growth and success. Our focus is on creating a lasting, positive impact for owners, employees, and the community through each transition.
