How much is your business worth?
One-out-of-four entrepreneurs is juggling more than one business. If your aim for this year is to narrow your focus—or to scale back—you might need to start thinking about how to assess the value of your business. But where do you start, and how will you know you’re selling for the right price?
There are a few ways to approach this tricky process, but it’s a good idea to get your house in order first.
What to do before you put your business up for sale
Try to resolve any issues that might give a buyer pause, if you have them:
- Any tricky legal history, or open litigation
- Any copyright issues
- Incomplete books, or outstanding taxes
And then try to appraise and enhance your best selling points, sometimes referred to as goodwill, which allows you to ask for the higher end of a price range:
- Growing online traffic, from multiple sources
- A valuable brand
- Repeat sales and repeat customers
- Predictable drivers of new sales
- Established processes and suppliers
Methods for working out how much your business is worth
In essence, your business is worth whatever someone is willing to pay for it. To make sure that you get the best price, consider using a professional. Find a chartered business valuator through the American Society of Appraisers (ASA). There are a few ways they might help you to value your company, based on your revenue, profit, location, size, debts, and potential.
Assess your assets
Pros: It’s a way to get out quickly and with little fuss
Cons: You won’t get the value of the work that you put in, and your company’s future potential
This method simply adds the value of everything your business owns and subtracts any debts and liabilities. It looks at your business as the sum of its equipment and inventory. If your business is no longer viable, this could be a good way to cut your losses, but if your business has unlocked earning potential, this method might see you underselling. Your business is likely to be worth more than its balance sheet, based on the inherent value of your systems and processes, and the work you’ve put into making it a success.
Check the market
Pros: It’s easy and gives you a realistic figure
Cons: There’s more room for negotiation, you’re relying on other companies in your area getting a fair price
This approach looks at other businesses in the same industry and the same area as yours that have recently been sold and bases the sale price on what they went for. For example, if you own a hardware store in the same area where two others sold for $65,000, that would be your baseline. This puts your valuation in the hands of other people though, so if they had debts, inefficiencies, or went for a quick sale, you’ll be basing your sale on their failure to value their business.
Multiples: times revenue, profit multiplier, or discounted cash flow
Pros: It takes into account your future potential, and considers your maximum value
Cons: You may have unique circumstances that get overlooked by these broad methods
A times revenue formula will look at your revenue over the past year, and estimate your earnings for the next few years by multiplying it by a number. The number your revenue is multiplied by will depend on the type of business you have. A good financial professional will be able to help you research typical sales multiples. This method is best for small companies that are poised for rapid growth as it takes into account how successful your business could be.
For example, if your revenue for the past year was $50,000, you could get offers between $100,000 (two times revenue), to $250,000 (five times revenue).
A profit multiplier follows the same method, but looks at the profits that a company makes over a period of time. This could work better for you if you have low overheads or haven’t taken a salary.
A discounted cash flow (DCF) method is similar to the profit multiplier but is adjusted to take inflation into consideration to calculate the present value.
Forget the formula
You might be in a geographic location that’s highly sought-after, next door to someone desperate to expand, or in the way of a new development project. In this case, your location could be your biggest asset, and you might find yourself in a great negotiating position. It’ll certainly be worth the investment of working with a professional to get the best deal.
It’s possible to use all of these methods to get to a range you’re comfortable with.
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