If you’re thinking about selling your company—either now or a few years in the future—the first thing you’ll need to know is the current market value of your company. After all, only by knowing the company’s value will you have any idea whether retirement or other financial objectives can be met or if an unsolicited offer from potential buyers or investors is a fair deal.
There are many methods and factors that go into calculating the value of your company; from totaling assets to considering the perceived value of your brand. But hands down, the most important factor in small business is cash flow. To obtain the most accurate current market valuation of your business, it’s ideal to consult someone with a successful history of selling businesses to qualified buyers in today’s market.
Some business brokers perform a full review of your company, analyzing your strengths and weaknesses and giving you a detailed valuation of what the company is worth. Obtaining a comprehensive analysis from a business broker, you’ll know where your business excels and what needs to improve to enhance value and make the company more appealing to future buyers or investors. Good business brokers will act like a buyer of your business and coach you on how the Exit Strategy process and Transaction Design impacts your Tax Planning and Term Sheet.
“It’s not what you sell it for, it’s what you keep that counts.” - Dan Stone
Why Consider a Business Valuation
Get ready for the real deal - Even if you aren’t planning to sell today, getting a valuation of your company is an investment in your business planning process. Getting a valuation ahead of time will help you prepare to answer questions, analyze your operations and capitalize on any low hanging fruit that will maximize the value of the company. When the time finally comes to sell the company, the process will be far less stressful thanks to your valuation. Think of it as a “test run” or “practice for the big game”. Best of all, you’ll have already gathered a lot of the due diligence material, so you’ll be able to facilitate the sale much more quickly.
Lay the groundwork - The truth is that the process of exiting the business you founded doesn’t happen overnight. It can take months of back and forth negotiations and preparations to hand off your company to the buyer, when you come to the market prepared. Going to market unprepared is a recipe for surprises, delays and ultimate disaster.
Get the best deal - You can’t know how much to ask for your company if you don’t know how much it’s worth! If you want an upper hand in your sale negotiations, it’s critical that you know everything there is to know about your company’s value.
Step it up in advance of the sale - A business valuation will help you to find both your company’s strengths and weaknesses. While you want to capitalize on the areas where you’re seeing success, it’s also crucial that you fix the weaknesses in your operation. These less than obvious weak areas will be discovered in the buyers due-diligence and will actually drive the value down, netting less out of the sale than you’d like.
There are many weak areas that could prove a red flag for buyers, from working capital position to accounts receivable turnover to customer concentration. By finding out about these weaknesses ahead of time, you can take steps to correct the problem so you’re in a much stronger position when the time comes to sell.
Realistic expectation - Just because another “company got an X multiple” for their sale, doesn’t mean you will too. Each company is different, with, unique operations, products or services with their own particular importance and other factors that add or decrease value. The only way to know how much the company is really worth is by getting a current market valuation tailor-made for your company with your processes, systems, products and services.
By getting a current market valuation, you can have an accurate snapshot of just how much the company is actually worth today. You’ll get the cold, hard facts about the value of your company, so there will be no more guesswork when trying to figure out a good sale price. You’ll be able to put together a solid business plan to sell the company for a price that is both attractive to buyers and reasonable for you. It will help you to be realistic about what the company is worth and how much banks would likely lend a buyer to acquire your company.
Working with a full-time, active business broker can optimize your valuation and save years of time and unexpected surprises in a transition or succession. Even if you don’t have an Exit Strategy yet and may not sell for 5-10 years, you’ll want to start gathering this vital information ahead of time. Preparation and education is the best way you can prepare yourself for what you need to know to be ready for when the day comes that you’d like to hand over the keys, liquidate your investment, and have someone else shoulder the responsibility, burden, and rewards of ownership.