You may already have a good sense of the value of your business. But the price you ask when it’s for sale is actually a different issue. If you price the business too high, interest will be limited. Buyers know the multiples companies sell for in different industries. If you price it low, though this is a less common temptation, you risk leaving money behind on the deal.
Buyer Seller Match is a good source to start gathering information to determine the right price for your business. It enables you, as a prospective seller to “test the waters” in the marketplace, without revealing too much information to anyone too soon.
Ultimately, buyer’s will assess your financial statements, industry comparable sales, asset valuations, return on investment, and the going concern, goodwill value of your business versus others. Short term, however, you may only want to show your hand regarding certain data rather than showing the whole picture.
While you may look to a broker or certified valuation expert to tell you the value of your business before listing it for sale, you can prepare in advance by employing some simple estimator tools to gauge what that value might be.
The first step is to get your financial statements in order. In order to estimate the value of your business, you’ll need to assemble formal financial documents for the current year, as well as the previous two years or more. Here’s what you should have:
Profit and loss statements for three years. The best document to use for these numbers are your tax returns for the last three years. Most advisors and brokers will tell you, you can glean more from a tax return on a small business than any other source of financial information.
A current balance sheet showing the value of all tangible assets and liabilities, and depending on your method of accounting, your intangible assets as well.
A report on seller’s discretionary earnings (SDE) showing how much the business actually has available for the owner’s use after adding back certain non-recurring or discretionary expenses. Your tax professional should assist you in recasting your P&L to accurately determine SDE over a three-year period. This is the most important benchmark to a buyer in deciding on the value of your business. Not short change yourself in calculating these numbers!
Estimate the value of the business based on an appropriate earnings multiple. The appropriate multiple for your business is based on a number of factors, but primarily your industry and the overall size of the business. In the lower middle market space, multiples tend to range between 2.5 and 5 times average annual SDE. Multiply your average SDE by the appropriate multiple to arrive at a good estimate of the price your business would sell for.
Liquidation value is another way of calculating the value of the business. It is based on the sum total of the assets the business owns today, net of depreciation (or amortization) and liabilities. While this tool can provide a helpful starting point, most businesses are going to be much more fairly valued (and to your liking) based on your history of earnings, and perhaps revenue growth.
If you want to maximize your after tax profits from the sale of your business, enlist the services of trained and skilled professionals from sources like the CSuiteXchange and/or IntermediaryLink to find the best people to assist you, not only in valuing your business, but in building the value of the business for the future, so you can some day walk away with everything you hope for!
Andrew Thompson is a licensed M&A attorney, business broker and business valuation expert with over 30 years experience working with small businesses and their owners, helping them to derive the best value from their business they are able.