Planning to sell your business and don’t know how much your company worth? Leaving a business requires understanding the business’s value.
An Excerpt from The Business Sale System: Insider Secrets To Selling Any Small Business.
When thinking about selling their company, usually the first question a business person asks is “How much is it worth?” Unfortunately there is no cut-and-dried answer to the question. Entire books have been written about valuation, and there are so many variables involved (and many of them are very subjective) that different experts looking at the same company could end up with different selling prices. There are some commonly accepted techniques and rules of thumb used, which are presented here.
Basically, there are two major ways to figure the price of a small business. One is the company’s ability to generate sales, cash flow and/or profits. The second method is to value the company based on its assets. Which method is used depends on the condition of the business and the industry it is in.
You may need multiple valuations depending on the buyer, nature of the business and the deal. Having clear books and records helps a buyer with due diligence, and you want to have years of financials readily available so you’re prepared for that unexpected offer.
Business valuations companies can help you in taking you through the process, and the only thing you have to do is to find one that’s reputable and specific to your industry, so they know your business and the cash flow.
Some steps that may guide you through the process as a checklist.
1. Be prepared
Valuations need a range of business information to value your business properly. Be ready with information related to following.
Finances and assets
- Your financial statements (for the last 5 years if possible) – such as cash flow statements, debts, annual turnover, and profit and loss statements
- Details of physical assets – such as machinery, buildings, equipment, and stock
- Details of other assets – such as goodwill towards the business and intellectual property (any designs or ideas that you have protected through copyright)
- Legal documents – such as leases and insurance policies
- Registration papers – such as business name certificates, Australian Business Number (ABN) registration papers, licenses, permits, and any other papers that demonstrate you comply with government requirements
Business profile, procedures and plans
- Market conditions – such as details of competitors, and how your business compares to them.
- Sales information – such as reports and forecasts
- Business history – such as start date, ownership changes, and location changes
- Business procedure documentation – such as marketing, staff roster and customer service procedures
- Business plans – such as marketing, emergency management and growth plans
- Other details – such as opening hours and whether the business premises are owned or leased
Staff, supplier and customer information
- Employee details – such as job descriptions, skills and experience, work history, performance reviews, and pay rates
- Supplier details – such as supply agreements and supply prices
- Customer details – such as customer numbers, customer profiles and direct marketing activities
- Professional Valuation- Required or not?
If affordable, consider getting professional advice on how to value your business through your accountant, a business advisor or a business broker.
These professionals can help you analyse your business finances, find trends within your industry’s market, and help you work out a value for your business. They can also help you calculate the goodwill value of your business and estimate your business’ future profit.
An advantage of using a professional is that they may have clients who would be interested in buying your business, saving you the cost and hassle of advertising.
- Choose a valuation method
If you engage a professional, they can help you decide which method is best for your business and explain any industry specific methods relevant to your business.
- Valuing a business based on sales
- Valuing a company using cash flow or profits
- Valuing a company based on assets
Keep in mind that there is no one set method, and a combination of methods can be used to arrive at your desired sale value. You may also need to negotiate the method of valuation with the buyer or the financier.