By Clearvue Business Brokers
February 9, 2021
If you are considering selling your business, the first things you’ll want to know are:
- What’s my company worth?
- What are my selling options?
- Am I positioned to get the highest value?
When selling your business, there are many transaction opportunities which can be effective in getting a deal done on your terms. Understanding the different transaction opportunities available to you can affect the offers you will receive and the price you will be offered. Likewise, understanding the key aspects of value in your business will help you with positioning it for a successful sale. Knowing what your company is worth right now will help you determine the next steps that you should take. Planning ahead is always helpful.
In this article, let’s talk about why the first item—knowing what your company is worth—is important for you whether you’re ready to sell now or looking ahead to a future sale.
Understanding Your Company’s Worth
If you want to receive maximum value for your business now or at some time in the future, it’s essential to understand where the value of your business is today. If you’re contemplating retirement or planning on using the proceed funds for other ventures, is the valuation where you need it to be to reach your goals? If it is, and if the timing is right, you may be ready to move ahead with the sale and transition process.
If you find the valuation lacking what you had hoped for, it will be helpful to know the most effective immediate steps which can be taken now to have a positive impact on the value of the business. Many business owners overlook or are unaware of simple things that can have a big impact on value. Addressing minor adjustments to specific areas of your business can help position you to receive the highest values when you are ready to sell.
Preparation is the key to receiving the best results in the sale of your business. As Warren Buffett said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
UNDERSTANDING METHODS OF ESTIMATING VALUE
Estimating the value of a business is more an art than an exact science. It has to make financial sense to a potential buyer to cause them to make the purchase. In other words, the purchase has to have an economic value and a return on their investment. There are several ways the value of a business is estimated. Here are two methods which are widely used.
Some acquirers or investors speak in terms of multiple of earnings when they discuss pricing of a business opportunity. The market multiples method is the price of the business divided by the company’s earnings. The simple view is that at the end of the day it all comes down to future earnings, and how many years of those earnings it will require to payback the initial investment. Tax benefits, synergies, strategic positioning, growth, and other advantages can add to the multiples’ calculation.
The buyers test method or return on investment method is often used by investors to determine if the acquisition pencils or makes financial sense. It factors in a required rate of return for invested capital. That rate of return is a method of measuring payback of the investment outlay into the purchase.
In the end, a business is worth what someone is willing to pay for it. However, understanding how a potential buyer will value your business and what it is currently worth will help you get closer to your goals when you are ready to sell your business.