Selling Your Business: Getting a Proper Business Valuation
The first step in the sale of any business is to establish its value or worth, which is determined through a process called business valuation. Valuations are necessary for a variety of reasons, including
- Buying or selling a business
- Securing debt or equity financing.
- Diagnosing possible cash flow problems.
- Adding or buying out shareholders.
- Determining asset value due to divorce or estate planning.
Your specific reason for requiring a valuation will determine the specific standard by which your business is measured (for instance, if you are trying to qualify for a loan you would use a different process than if you were trying to sell a business). However, there are many constants in the process, including the current market conditions, your company’s balance sheet, and the selling price of similar businesses in your area.
Selling a business is one of the most common reasons for a proper valuation. That said, in our opinion, it is always a good idea to have an up-to-date business valuation in place, or at least establish solid reporting methods, accounting protocols, and business operating procedures to make the valuation process as accurate (and as painless) as possible when the time becomes necessary to do one.
Business Valuation: Selling a Business
The Firm Business Brokerage has successfully sold over 150 businesses in part because of our fair and analytical valuation methods. We offer objective distance through specific analytical markers and equations to determine a fair business value and, therefore, a fair business price.
- Past identifiers: Using the last three years of tax returns, we work with the business owner to determine actual cash flow; “actual” cash flow removes owner-specific perks like a personal cell phone, mileage on their personal vehicle, or one-time expenses for capital expenditures that won’t carry over to the new owner.
- Present identifiers: Our valuations always begin with a thorough analysis of the business as it exists in the current climate.
- Future identifiers: The bottom line, or net profit of the tax return, only tells a portion of the story. Several deductible items are not “hard” costs that the owner pays each year. Things like depreciation, the owner’s W2 salary, associated taxes, and paid loan interest are specific to the owner and are not relevant to the business after it is sold.
As you are probably aware, cash flow is one of the most important factors in determining the value of a business. Once this number is determined, we apply 20 different parameters that include the longevity of the company, the owner’s day-to-day involvement in the business, specific growth opportunities, financing options, and so forth. We rank each of these separately and assign a value to each, creating a specific multiplier that determines the fair and lendable purchase price for the business.
The Importance of Confidential Business Valuations
There are several circumstances where business owners may want to complete a business valuation without it being common knowledge, particularly when they want to maximize the proceeds from the sale of their company before they place it on the market. The Firm offers a complimentary and confidential business valuation that includes the above assessments while providing the objective, detail-oriented, and professional service you’ve come to expect from our award-winning business brokerage.
Opportunities favor the prepared. Start your business valuation process now.
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