How To Value a Business
You have worked hard at your business for years, nurturing it from a small start-up to the successful enterprise it is now. For whatever reason, you have now decided to sell your business and move on and need some advice on business valuation. Of course you should seek professional advice but here are some pointers.
But how do you put a price on the business you have spent so much time on? Unlike bricks and mortar, or used cars, there is no accepted and straightforward way of putting a value on a business
Planning your exit strategy
Very few new business owners give much thought into how they will go about selling their business from the beginning. After all, all your energy has to go into starting the new enterprise and making it a success.
Selling the business will probably never even entered your mind. But, like most enterprises, if you make plans for your exit from the very beginning it makes things lots easier when the time does come to move on. Mistakes to avoid when valuing your business :
Do not value your business too highly based on your emotional involvement in it. There is a psychological tendency for people to overvalue things they have owed for a while or created themselves. When you put a lot of yourself into something you will become emotionally attached to it and will think it is worth much more that other people do. My friend Sue had a violin she played for 30 years. During a financial crisis she decided to sell it and was convinced it was an excellent make and was worth over £1,000. The sad truth was that is was a German journeyman's violin worth £100. Here emotional attachment to the instrument had overvalued it by a factor of ten!
Tied to the point above is the problem of misrepresenting the value of your business to prospective buyers. Of course, you need to show your business in the best light and to put your best face forward but exaggeration and distortion of facts and figures will rebound on you later and can even be a big legal issue. Get the opinion of a disinterested third party for your valuations before giving the information to a potential buyer.
Giving Negative Reasons for Selling your Business
No one wants to buy a business the creator no longer has faith in, so be prepared to give a good answer to the inevitable question "Why do you want to sell your business?". So don't say that you are tired of your business, or worried about its future prospects. Most buyers will expect the current owner to be involved in the transition period of the sale and need to see you still have enthusiasm and energy to put into the business.
How you can Accurately Value your business
Enlist the help of an agent who understands your business and its market: They will have the information from a range of sales of similar businesses and will be in a better position to judge its value. They may also have a portfolio of potential buyers lined up waiting for a suitable business, which could be yours!
Define your assets: Material assets are relatively easy to value. You may have a warehouse full of machinery, a loyal and talented staff and an impressive record of sales. On the other hand, your reputation, established over a long period of time, your website and business links - the so-called "goodwill", is a much more slippery beast to put a value on. This is the part of the business which is regularly over-valued, so be prepared to think hard about this.
Compare you business to other similar ones: Unless your business is unique in the market place there will be other businesses that will be similar and that will have been sold over the past year. Although you may not be able to find out the selling price yourself, your agent should be in a position to make a comparison.
Asset / Earnings-based valuation: The buyer will want to know that he is buying into a profitable business and the net profit after tax, the yearly expenditure and income and asset valuations are all relatively easy figures to provide, which will help put cash value on your business