Starting a small business can be risky, but it is often worth the risk if you have a solid business plan. While there are many motives for starting your own business, the goal of selling it for a profit is one of the primary reasons individuals do it. The process of selling a business can be daunting, even if you’ve done it before. It often requires special skills and information to be successful.
Rather than improvising through the sale process, it can be highly advantageous and financially profitable to gain an understanding of the entire process of selling a business, including how to make a business valuation work to your advantage.
What is a Business Valuation?
A business valuation is the process of determining what your business may be worth. There are multiple methods to determine that value, including several common methods, such as:
- Market Value Valuation: This method is more subjective than other business valuation methods. It determines the value of your business by comparing it to similar businesses that have recently been sold. It only works when there is sufficient data about competitors to compare.
- Asset-Based Valuation: This method considers the total value of your business’ assets less the value of its total liabilities on your balance sheet.
- Earnings Value/ROI-Based Valuation: This method determines your company’s value based on its profits and what kind of return on investment an investor could expect after buying your business.
In addition to the most common valuation strategies, other approaches include the discounted cash flow method, book value valuation, multiples of earnings method, and the discounted cash flow valuation method. Regardless of which method you use, the goal is to determine a reasonable estimate of the total worth of your business. Achieving this involves complex processes, industry and location knowledge, and extensive calculations. Though the business valuation process may seem intimidating, it is worth completing before setting your sale price.
The Benefits of Getting a Business Valuation Before Selling
Knowing the current market value of your business and how to increase earnings before interest and tax are critical if you are considering selling your business. Assessing the performance of your company in several areas can provide insight for developing and improving your business.
If you have some time between the valuation and the sale, optimizing performance and improving your business will maximize your investment. Addressing any deficiencies before the sale occurs may increase the potential value of your business.
Even if you don’t have time to make changes to your company, a business valuation can still serve several purposes. It establishes goodwill between you, the business owner, and any potential buyers. It indicates your willingness to obtain a fair and objective market value for your company since valuators are non-biased third parties to the process. Beginning negotiations from a neutral position can often encourage better good-faith discussions, ultimately leading to a sale price that works for both parties.
At any given time, thousands of businesses are for sale in the United States. Obtaining a business valuation can help streamline the entire process of selling your business by signaling that you are serious in your intent to sell. When you have a strong understanding of your company’s finances and worth, you can get the attention of potential buyers. It’s easier for them to enter into negotiations when they can start with the data you already have versus attempting to do so with a business that hasn’t been professionally valued.
In addition to attracting more potential serious buyers, business valuations can also make the lending process smoother for the buyer. This is because they already have the documentation they can take to investors or potential lenders to obtain any financing they may need. And this benefit can make the entire sale quicker and with less hassle.
Selling a business is a huge milestone and achievement. A proper business valuation can give you many benefits throughout the sale process. To learn more about business valuations, contact Shuster & Company today.
A full-service Certified Public Accounting Firm located in Denver, Shuster & Company P.C. provides quality, personalized financial advice and guidance to individuals, businesses, and the legal community. We offer an extensive range of services, with emphasis in forensic accounting, business valuation, and litigation support.