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Use Recognized Business Valuation Methods to Sell Your Business
What's the Best
Small Business Valuation Formula?
Use recognized business valuation methods to value your business for sale. Why do you need a small business valuation formula or free business valuation software? Because you want to make sure that you use formulas that are market-compatible, accepted by buyers and that can be rationalized (that is, supported by the data).
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Using industry standard methods will help you assess the value of your business for sale (some owners use business valuation methods when they want to buy out a partner, or sell their shares in the corporation, or raise more money for the operation).
Ideally you will plan your business exit strategy early; and include it in your strategic plan. When you get ready to exit your operation, you start thinking about how much you can earn from the sale of your organization.
Emotions can get involved in how you value its worth. But you need to distance yourself from the emotions and use a small business valuation formula, or free business valuation software, or hire an appraiser.
Business Valuation Methods:
What Do You Need for the Valuation?
Financial statements: present, past (minimum 2 years but 5 to 10 years are better since they should show trends, hopefully growth trends), and the forecast for future.
Market value: of real estate, equipment, inventory and other assets that would be transferred in a sale of the operation.
Value of intangible assets and goodwill: employees, management team, years in operation, brand reputation, sales book and type of customers, length of relationships.
Business Valuation Methods:
What is Recasting Financial Statements for Exit?
When you are ready to exit your operation, you need to recast the financial statements for the past three to five years and to project financial statements for new ownership.
Why do you recast the financial statements? Because, as an owner, you may be paying yourself a larger salary than market value, or you may have hired family members to work for you at higher than market value, or you may have provided yourself with perks and benefits that are expensive and not what the market would pay, and more.
Typically, an owner tries to minimize profits to minimize taxes. Or the owner might want to be paid higher than market value to pay for the time and risk investment. But once the owner wants to sell, the financials need to be recast.
When you want to sell your operation, you need to adjust or recast the financial statements to better reflect the market value of the company and the profit potential. Normally you would want to make actual adjustments to those payments for a couple of years before you sell or exit the operation.
However, if you're in a hurry to sell you can have your accountant develop recasted financial statements to reflect the differences if you adjusted your salary and benefits (and any family members you're paying), if you removed interest payments on loans that would be paid off upon the sale of the operation, if you sold some assets separately from the operation, if you remove or sell-off obsolete inventory, and other items that your accountant recommends.
Important note: do not hide or cover up these changes. Keep careful documentation of the changes; you're not trying to hide or cover up these changes, you are trying to present the statements in a more realistic way for new owners.
Present the documentation (with explanations) to potential buyers. Use the recast financials to forecast 5 years ahead (using established trends; e.g. if sales have been growing an average of 4.5% during the past 5 years, use that trend in your forecast).
Common Types of Business Valuation Methods:
Assets: book value, market value and liquidation value;
Earnings: gross income multipliers, dividend payments, number of shares, financial ratios, debt paying ability and cash flow;
Excess earnings method of assessing assets and earnings;
Market and market share: industry comparisons for similar sales;
Future earnings: discounted future cash flow or earnings.
What About Free Business Valuation Software?
Is it Really Free?
These methods provide a small business valuation formula; you can also find free business valuation software online (but most of the free software comes at a price; an appraiser will want your contact information).
When you decide to sell your organization, hire a professional (preferably one who is experienced in your industry or business) to complete the valuation, and work closely with an accountant, lawyer, and with a commercial broker or sales agent. It is important to get the best professionals to work with. (The business valuation methods discussed on this site are only a small sampling of methods available and are not discussed in detail; they provide an overview only).
If you plan for your business exit strategy now, you will be ready for your exit when it needs to happen. If you use the best of the business valuation methods for your operation, you will be able to get the maximum value from it as you leave.
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Additional Reading:
Business Sale Agreement: Use Business Valuation Tools Before Selling
Plan your Business Exit Strategy.
Gross Profit Margin: Understanding It Will Help You Better Manage Your Organization
Startup Financing Methods: Consider Bootstrapping as One Option
How to maximize profit?
How to manage working capital?
Return to Calculate Profit.
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Meeting Financing Challenges
Getting financing for starting up your new business is a challenge.
But just as challenging is ensuring that you have enough financing to operate your business.
Most businesses do not have a steady flow of cash incoming (or outgoing); it comes in 'fits and starts' no matter how much we try to plan for consistency in cash flow.
You need to ensure that you forecast your cash flow needs realistically and that you are on top of your accounts receivable; do not let your customers use you as their bank (by extending long payment terms), especially during the start up years of your business when every dollar is important to your success.
Make sure that you are clear in setting up new customer accounts: tell your customers what you need and expect in terms of payment (for example, cash on delivery (COD), 15 days from date of invoice, a deposit on order and balance on delivery, etc.).
However, also make sure that your invoice terms are competitive for your industry; check out what your competitors offer and make sure that your terms are competitive. For example, if you want payment in a shorter time frame than your competitor offer an incentive for that earlier payment: perhaps a discount of the next order, or a rebate, or a gift.
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