When a business owner decides to sell a business, the first key step to take is to get an objective assessment of the current value of the business.
The key word is “objective.” If you are an independent business owner, you have invested years of time, money and sweat to build your business. So, you inherently attach more value to it than a third-party would. On the other hand, you are the person who best understands your customer base and might have a better handle on its long-term value to a buyer. Striking the balance between these competing perspectives must fall to a third-party assessor, which is typically a business valuation specialist.
Personal feelings about, and emotional attachments to your company’s current condition and history are not the determining factors that give value to the enterprise. The true marketplace value of any business is the amount someone else is willing to pay for it. And among the items that do help to determine its true value include such things as accurate accounting and documentation, how a deal is to be financed, proactive tax planning to reduce taxes and increase bottom-line profit, and implementing a third-party valuation methodology.
“An objective valuation can increase a seller’s ability to negotiate the highest price for their business,” reports Blake Coleman, a business valuation expert and Senior Vice President for Valuation & Venture Consulting based in Irvine, CA. Coleman also notes that three commonly used valuation approaches are:
- Asset-Based Approach: The value of the business is determined by the total value of the company’s tangible and intangible assets. This method is the simplest, and if the assets are the primary value the business contains (i.e., a closing retail shop or a liquidation sale) this could be the path to take. But, this approach does neglect the value of the company’s current and future earnings potential, and is not used for the sale of thriving companies.
- Income Approach: The value of the business is determined based on future earnings potential. Specifically, the underlying premise of this approach is that a business’s value can be measured by the present worth of the economic benefits to be received by the company’s shareholders.
- Market Approach (Earnings Multiplier):Price or value is based on some multiple of the business’s earnings potential. Prospective buyers can translate the purchase into earnings and calculate a return on investment (ROI). These estimations can also make comparisons easier between other buying opportunities.
Buyers and sellers can disagree, however, on the assumptions used to calculate the earnings potentials, notably over the multiplier used. People also have subjective perspectives on risk, so the valuation must reflect business risk as well as industry standards. A business broker or investment banker tackles these issues by researching recent transactions of comparable businesses “comparables” to ground their assumptions in more objective territory. This is just one of the many benefits business sellers gain from using a business broker or investment banker.
Make Plans to Shape Your Business Up for Sale
If you have owned a small business for many years, you may be disappointed in the objective value calculated for it. That is why it is prudent to get a business valuation done years before you want to sell. That valuation becomes a baseline to help you develop an action plan for raising the appraised value of the business well before the sell date. Here are some tips to consider.
First, get more organized: Clean up your customer databases. Tighten up your cost controls. Negotiate better long-term deals with vendors that your buyer can inherit. Formalize and document all marketing campaigning. Capture and report accurate accounting records to give buyers reliable profit and cash flow projections.
Second, review past financials and tax returns. Do not leave unclaimed tax benefits buried in your business records for the new owner to find and cash in on!
Third, make smart investments that set the company up to capitalize on predictable industry trends. Resist the tendency to stop investing in your business (a natural tendency when a sale may occur.) Keeping the business up-to-date actually raises business value, just as certain remodels in a home for sale improve the price obtained.
Buyers are paying for potential, and the harder it is for them to see that potential, the less they are willing to pay. Cleaning up your business affairs allows that potential to shine through!
You could also decide whether you can offer seller financing. Buyers are struggling to finance deals in today’s tougher lending environment. By agreeing to keep some of the risk of the sale, you will probably generate more interest among buyers, and may get a better price.
Finally, it is very important that you fully understand the tax implications and how to solve them. You need to take a careful look at the tax impacts of selling your business well in advance of the sale. How can that be managed to maximize the cash you receive when the sale closes? Viable options to save on and defer taxes can be implemented if you plan ahead. TaxWealth finds missed planning opportunities, taxes wastefully being paid, and help to lawfully put those dollars in the business owner’s pocket. Sometimes it is also possible to recoup taxes previously paid. All this contributes toward commanding a greater sale price of the business when you sell.
Selling a business has a long list of ramifications that a good team of advisors will help you manage. Working, for example, with an experienced business broker can shorten the sale process, remove a lot of the stress by managing expectations, and maximize the price you get. If you need referrals to qualified business appraisers or brokers let me know.