One of the most common questions when someone is considering selling their business is, “how much is my business worth?”
This is such an important question because if you undervalue or overvalue your business it will result in a less than satisfactory outcome. If you overvalue your business, either no one will contact you or if a buyer does contact you, and starts to do their due diligence, they will not get back to you or put in a much lower offer than expected. This results in disappointment and a lot of time being wasted. On the other hand, if you price your business too low you are potentially leaving money on the table or buyers may think there is something wrong with your business and not even approach you.
It is estimated that 84 per cent of businesses listed for sale do not sell and many of the businesses that do sell often are sold for a lot less than they were originally advertised for.
When selling a business there are also a number of different ways the deal can be structured and financed. There is a saying, “you can name the price if I can name the terms.” Not all business sales are paid in one lump sum, there is often vendor financing, earn outs, performance bonuses and many other creative ways of financing the sale of the business, all of which affect the price paid for the business.
To keep things simple let’s, focus on three valuation methods that can be used to value your business. There are a number of variations of these three primary methods.
The easiest way to value a business is based on its “Net Asset Value”, in very simple terms you would add up the market value of all the assets, take away any liabilities and the figure you are left with would give you a value. Even this method can be a challenge particularly when you try and work out what the market is prepared to pay for your used assets. This method may be one of the easiest however it often results in the lowest value. To get a higher price for your business you want to sell your business as a going concern.
The second method is based on a market approach where your business is compared to similar business and what they have sold for. Unlike the property market there is no single database of all businesses sold and how much they sold for. Many industries have access to data and have benchmarks on how to value a business. These often based as a percentage of sales revenue or a multiple of profits.
The third method is future earning potential of your business. In other words, the value of your business is determined by your business’s ability to make money in the future. The buyer of your business wants to know that they are going to get a relatively good return on their investment both in terms of money and time.
This is where it gets interesting. Certain buyers for your business may be able to get a better return on their investment based on their skills and access to other resources. Often businesses that are sold as part of a bigger strategic plan are able to be sold for more money than if they were sold just to someone looking to buy themselves a job.
If you are selling your business as a going concern the potential buyer for your business is going to want to see how your business has performed in the past, how it is currently performing and how it can perform in the future. And this is where things can get a little more complicated!
A good starting point is you need financial figures which accurately represent how your business has and is performing. Many business owners only have financials for tax purposes. This often results in distorted figures because business owners want to minimize the amount of money they pay in tax.
When valuing a business, it is common practice to use what is called “Adjusted Figures.” This is where certain expenses are added back to the profit for example, interest paid on loans, depreciation of assets and certain once off expenses. This sounds great, right? Well then other expenses are now included for example if the business owner has not been taking a market related wage then this needs to be accounted for and get taken off the profit.
Once you have accurate figures on how your business has performed and is performing then projections can be made with regards to future performance.
As a general rule of the thumb the more profitable your business is the more valuable it is, however there are a number of other factors that have an impact on the value of the business. These include the assets, cash flow, the business’s reliance on you, key staff, customers, suppliers, the economy, the market, competition, location and industry to name a few.
So it is best to work out a price range. There are a number of different resources available including online calculators, benchmarking data or professionals including your accountant, business valuers, brokers or merger and acquisition specialists who can help you in this regard.
There is a popular saying that a business is valued on past performance and sold on potential.
In reality the sale price will be achieved only when you have a willing buyer who can pay the amount of money you want to sell your business for within your set criteria, like required time frames and payment terms.
The really important question to be asking is, how much money do I get to keep? Once you have sold your business there are all kinds of costs that need to be taken into account which can seriously diminish the amount of money you end up with.
Taking this into account the first question you need to answer is really, how much money do I need? Then get expert advice from a qualified and experienced advisor.
Remember motivated buyers tend to pay higher prices to unmotivated sellers and motivated sellers tend to accept lower prices from unmotivated buyers. In other words, the best time to sell your business is when you want to, not when you have to. What is good for the buyer is also good for the seller, so the sooner you start to prepare your business for sale the better.
Stuart Goodfellow and Sam Harrop have consulted thousands of small business owners in Australia and globally, helping to improve business systems, sales and marketing processes, financial acumen and team performance. To find out how to make more money from selling your business than running it, go to SBBE.