Valuing your business accurately is essential if you don’t want to risk leaving money on the table or scaring away potential buyers. In order to find the true value of a business you need to employ a business appraiser.
The value of a typical small business should be greater than the total values of its tangible assets. The buyer is looking for a business that has everything necessary to function successfully — equipment, location, inventory, employees, suppliers, business processes and a customer list. These are referred to as goodwill.
A Price Tag
When you set a value on your business you should consider:
- Factors that are most important to buyers
- How you can boost these important factors before the sale
- Financial statement picture before showing them to a potential buyer
- Methods and formulas commonly used to price a business
- How selling part of the business can affect the price
Key Selling Points
Most buyers are interested in earnings and cash flow. Buyers want to know that your business will provide a stream of dollars that’s predictable, steady, and high. Your income stream is key. You need to prove the size and regularity of your positive cash flow, preferably with audited financials going back at least three years.
Assets are also important. Real estate, equipment, patents or trademarks, and even inventory, customer lists, and contractual relationships you’ve established. Buyers will examine your key [abbr title=”liquidity, efficiency, profitability, solvency ratio’s”]financial ratios[/abbr] to see how your business compares to the industry average. They want a clean balance sheet with low debt. Some buyers might be interested in the fact that you have an experienced manager or employees in place.
One way to entice a potential buyer is to recast historical financial statements and prepare projected statements. Your accountant can project how your future statements will look in the next five years.