In order to sell your business for top dollar, you must demonstrate its value. That value is based on a lot of numbers and calculations, but it also includes factors that can be harder to capture on paper. The reality is, conducting a thorough and accurate business valuation is both an art and a science.
Most buyers focus on the same key elements of a business to determine how much they’re willing to pay. But unfortunately, many business owners don’t understand all the elements that go into assessing a business and assigning a selling price. Without considering these essential elements, business owners can find it harder to attract buyers and get great offers.
The business advisors at Viking Mergers & Acquisitions are masters of both the art and science of valuing businesses. You can work with one of our advisors to collect the information needed to determine the value of your business and present that value in a clear, confident manner. We are committed to educating business owners on the selling process, so we’ve put together this guide to understanding the art and science of business valuation.
The Science of Business Valuation
The science of business valuation refers to the numbers and on-paper data that demonstrate your business’s financial health. In addition to the raw data, you’ll want charts and diagrams that clearly showcase your business’s key performance indicators. That way, a prospective buyer understands the business’s current standing.
Some numbers your business advisor may focus on in your business valuation include:
- Cash Flow: This refers to the amount of money coming in and going out of your business, a comparison between how much money you make from customers or clients, and how much you pay out to creditors. Income-based business valuation is just one way to assess and demonstrate your business’s value, but bad bookkeeping is one of the biggest deal breakers in any business valuation.
- Comparatives & Industry Standards: Analyzes what similar businesses have sold for as a multiple of cash flow, EBITDA and sales in comparable industry sectors along with industry trends and insights.
- Equipment: Have all equipment used in your business appraised to determine the value of these vital assets. This information can also help a prospective buyer understand the quality of equipment you use in your business and whether they may need to invest in more up-to-date assets.
- Inventory: You need to keep track of your inventory for business valuation, too. A buyer wants to see organized inventory systems in addition to a healthy inventory flow — not too much stock, but also not too little.
- Operations: The size of your team, productivity rates, and types of operational activities should be tracked so that prospective buyers understand what makes your business tick and how you get it done.
Buyers are more likely to pay top dollar for businesses that can demonstrate their use of clear, regulated processes and are forthcoming with important financial information. A Viking business advisor can help you establish these processes, start tracking vital data, and find data analysis methods that present your business’s financial status in a compelling way.
The Art of Business Valuation
The art of business valuation involves using more of the subjective and intangible assets of your business to emphasize the on-paper numbers that make a business’s value clear. You can use the following information to forecast your business’s growth potential and demonstrate its return on investment for prospective buyers:
- Reputation in the industry: Buyers want to know who your competitors are and how you stack up. You’ll need to clearly define what makes your business different from those competitors, such as your unique niche or value prospect.
- Transferability: This refers to how easy it will be for a new owner to take over. While you can establish processes that make the transition of ownership smoother for the buyer, the Transferability of Future Cash Flow is another important valuation concept to keep in mind. Buyers want to know that customers and clients will stick around after they take over.
- Customer base: Being able to demonstrate an even distribution of low-value and high-value customers/clients shows that your business can better withstand changes. Losing one big client could negatively impact your business’s cash flow, which can make your business less appealing to buyers.
- Management team: Buyers look for a strong management team, especially senior management. They need experienced, skilled, and confident leaders that can keep the business running smoothly and can be trusted to make effective decisions that benefit the business.
- Patents and licenses: Does your business own the rights to make certain products or have the potential to patent? Do you have pending patents? Do you license out your products as a revenue stream? Having documentation of current or pending patents and license agreements can improve your business’s value.
A Viking business advisor can help you identify the most compelling and relevant “art” factors of your business. Then, they can collect empirical data and anecdotal evidence that shows buyers the quality of your business and the potential it offers them.
A business valuation is the most important piece of financial information for your business, no matter if you’re selling soon or further down the line. Therefore, it’s vital to work with a firm like Viking Mergers & Acquisitions that knows how to value a business accurately and confidentially.
Our decades of experience allow us to streamline the business valuation process while giving you a tailored, confidential, and professional business brokerage experience. Contact us today for a complimentary business valuation or consultation.