Selling a Business
Are you preparing to sell your business or looking to sell within the next five years? As a business owner identifying early on the value of your business can help you better position your company for sale. If you plan on exiting within the next five years, it is a good idea to know the baseline value of your business today.
Peak Business Valuation, a business appraiser Utah, is here to help you understand that value. Then you can develop a strategy to increase the value of your business. Below we outline several steps to selling a business and how a business valuation can help throughout the process.
Prepare for the Transaction
It is smart to prepare an exit plan as you prepare to sell your business. An exit plan is designed to maximize the value of your company. Without a plan, there is a potential risk of leaving money on the table when it comes to selling your business.
Business owners who define their exit goals and execute them are in a better position to transact. If your business is not where you want it to be to sell, getting a business valuation can help you understand the value of your business today. The valuation can also help identify opportunities to grow the value of your business. Peak a business appraiser Utah, loves to help small business owners prepare to sell their company by providing quality business valuations.
Determine a Selling Price
One of the key points to selling your business is determining its value. It is important to have your business valued by a professional business appraiser, such as Peak Business Valuation. Having your business valued can help assure that the selling price isn’t too high or too low. If you overprice the business, it can scare off potential buyers or limit the financing options of buyers. Just the opposite is true, if you underprice the business, you could end up leaving money on the table.
By understanding the value of your company, you will be able to support the selling price and more efficiently negotiate with potential buyers. The closer the selling price is to fair market value, the quicker the business should sell. By working with a business appraiser, like Peak, a business appraiser Utah, you can be more confident in the fair market value of your business.
Methods to Determine the Selling Price
There are several ways to determine the value of your business. A valuation expert, such as Peak Business Valuation, business appraiser Utah, uses a variety of methods when arriving at the fair market value of your business. Below are a few of the most commonly used methods.
Market Comparables: this is one of the most common ways to calculate the value of your business. This approach compares your business to similar businesses that have recently sold in a private market. A business valuation expert searches databases of private market transactions to find comparable businesses to your business.
Industry Multiples: valuing your company with industry multiples is the most popular valuation method. A valuation multiple is a ratio of a financial aspect such as revenue and cash flow compared to the company’s sale price. The valuation expert compares these ratios to similar companies that have recently sold. Afterwhich the valuation expert applies multiples to your business to determine a range of values. Common multiples derived from these databases include revenue, EBITDA, and SDE multiples.
Asset Valuation: another approach to value your business is to determine the total value of the business’s assets. These assets include all tangible assets, such as inventory, furniture and fixtures, equipment, and land. The calculation includes intangible assets as well. Intangible assets consist of brand recognition, goodwill, patents, intellectual property, etc… One drawback to this valuation method is that this approach does not take into consideration the future earnings of the business.
Discounted Cash Flow: this valuation approach seeks to forecast the cash flow the business will generate in the future and discount it to the present time. This method is helpful because you can predict the business’ profitability in the long-run. This approach is sometimes difficult to use for small companies because future earnings are harder to predict.
Capitalization of Earnings: this valuation approach is more straightforward than the discounted cash flow analysis. This valuation approach observes historical financials and is based on the assumption that a single period provides a reliable estimate of what the business will generate for investors in the future. This method is most common to use for small businesses.
Understand Types of Buyers
The next aspect of selling a business involves understanding the types of buyers and how they view your business. Below we will review three types of buyers:
· Individual buyers: selling your business to an individual is often the quickest approach. It is very common to see business owners sell their business to a current employee. The selling price to an individual buyer is often less than it would be to a strategic or financial buyer. Individuals commonly use the SBA loan program to obtain financing. However doing so can take anywhere between 30-90 days to close the financing.
· Strategic buyers: selling to a strategic buyer often takes the longest. Strategic buyers usually include a competitor that offers similar products or services or a larger company that is looking to expand its growth. Strategic buyers are often willing to pay a higher price for your business because of the synergy it can create.
· Financial or Corporate buyers: selling your business to a financial or corporate buyer typically falls in the middle of an individual buyer and strategic buyer. These buyers are looking for a good investment. Private equity groups are common financial buyers. For more information, see the blog on Financial vs. Strategic Buyers.
Seek Professional Help
It is highly recommended to have your business valued by a reputable business valuation firm such as Peak Business Valuation, a business appraiser Utah. We also advise receiving professional guidance from a legal expert and CPA. The business appraiser, CPA, and legal professional all have superior knowledge to assist in selling your business. A legal professional is especially important to make sure the transaction is within legal compliance. A CPA can assist in the preparation of financial statements, file tax returns, and provide advice. By consulting with a business appraiser, CPA, and legal professional, the transaction of selling your business will be a smooth transition.
Peak Business Valuation is one of the top business appraisers Utah. Our goal is to help business owners determine a fair market value for their company. In turn, this helps you to set a fair and reasonable listing price and help maximize your return. We would love to help you start the process of selling your business. Peak Business Valuation is happy to answer any questions you have. Please reach out via email or click below to schedule your free consultation!