Business Valuation

If you’re considering whether to sell your business, the first thing you’d want to know is how much you can get for it. A business valuation is the first step toward selling your business. It helps us determine a fair asking price for when the business is listed for sale. We use a similar formula that is used by business loan underwriters when they are considering whether to approve a loan to the buyer for purchasing the business. In most cases, this helps determine the pool of buyers, though not all businesses are purchased with lender financing. There are multiple other methods and processes for valuing a business. Yet, the way we do it is standard for business sales.

Selling a business is often compared and contrasted with selling real estate. The business valuation that is performed when considering a business listing accomplishes a similar goal as a Realtor® using comparable properties or “comps" for a residential real estate listing. Comps help to determine a fair asking price. However, business valuations are almost always an income-based method, which is different from using comparables.

While business valuations accomplish a similar goal of determining the asking price, there are at least two other similarities that it has with real estate comps. One is that the valuation is not any type of guarantee for what the business will sell for. It is just the starting point from which buyers will often try to negotiate. Sellers should generally not expect to get the asking price; in fact, quite often they will get less. A business will only sell for what the market will bear if it sells at all.

Property appraisers can illustrate a second similarity. Just like a property appraiser has a more advanced method of determining the value of a property than when a Realtor® does “comps", there are other, more sophisticated methods of determining the value of a business than the method we use for business valuations. However, these more advanced methods will require out-of-pocket costs and since they are not as standard, they won’t always be as acceptable to the buyer at the negotiating table. Just like a Realtor’s comps will suffice for most property listings, the business valuation that we do will suffice for most business listings. It at least gives you a “ballpark" number. Paying out of pocket for the more sophisticated methods can be done if it helps give you perspective on whether to sell or not, or if you think it might give you more negotiating leverage. We have resources for business “appraisals" when you might want it.

So what happens when a business sale includes real estate? The business portion is calculated by a business broker while the real estate portion is “comped" or valuated by a Realtor® and then the two (business portion and real estate portion) are sold concurrently. (If you happen to be selling commercial real estate then it is also usually valued using an income-based method.)

The following documents and sources of information are required for us to perform an adequate business valuation. A savvy buyer, or a buyer’s broker, will ask for similar documentation to verify that the asking price for a business was calculated correctly.

Business Questionnaire

This questionnaire has a series of questions that help us get an idea of how the business is operated. Information like the number of employees, what you’re doing for marketing, and how your prices compare to your competitors will help us and a buyer determine current value and areas where they might have the opportunity to grow after the business is sold.

List of Tangible Assets

The seller will often estimate the current value of each asset on this list. As a guideline they can ask themselves how much would this asset sell for by itself in it’s used condition. Accountants will often depreciate assets for tax purposes, but we don’t use the value of an asset on your balance sheet, since it is often lower than what it will actually sell for. We may use additional resources to perform “comps" on tangible assets.

3 Years of Financials

Three years of financials, most importantly the income statement or Profit and Loss statement (P&L), tells us how much the business has made over the last three years. The net income is used in the valuation, not the gross. If the net income has consistently been over $100K a year for the least three years (including the owner’s salary and other expenses that we might add back to the net income which are direct benefits to the buyer), then you might be eligible for a multiplier, which means the business sells for more. The higher the income, and the more structure to the business, the higher the multiplier. A multiplier can be between 1-5.

Tax Returns & Other Information

While we don’t need tax returns to perform a business valuation, a buyer will certainly ask for tax returns to verify the income of a business. They don’t have to be provided up front, but they will eventually need to be provided (other brokers might require it but we don’t at this stage). If the sale includes real estate then the Realtor® will need the address to perform comps or an income-based valuation for the real estate.

Find out the value of your business. Determine a fair asking price as a step towards selling or buying.

Contact us today to get started on your business valuation or simply get more information. Fill out the form on our contact page or call us at 480-744-5919.