Valuing Your Business
When selling your business it is very important to establish a fair and reasonable value for the business, based upon an independent analysis that will withstand scrutiny, from a variety of interested parties. This valuation may be used for a variety of purposes, including: substantiate your asking price to the buyer; serve as the basis for a business loan from lending institutions; help determine fair market value of assets; and help establish an Employee Stock Ownership Plan (ESOP) for your employees, to mention a few.
There is a high correlation of deals that close when business owners have had professional valuations and abide with the valuation’s pricing and terms. The International Business Brokers Association estimates that over 70% of businesses for sale never sell! We suspect that the success rate is so low because of the seller’s unrealistic pricing and terms. This is why working with valuation experts that understand “real-world” deals, and how to get them done, is critical to achieving wealth-planning goals.
The value of a business is based on three things: what it owns, what it earns and its risk versus return.
What it owns
The tangible assets include the furniture, fixtures, equipment, inventory and real estate. The intangible assets can include the trade name, contracts, leases, processes, client lists, licenses, recipes and patents.
What it earns
A business provides a certain financial benefit to the owner. The benefit generally comes in the form of business profits and a salary for the owner. It can also provide the owner with fringe benefits such as health insurance, a company car or a retirement plan.
Risk versus Return
Every investment has a perceived level of risk and an expected rate of return. In determining the goodwill component of the business sale, the likelihood of future income and the repeatability of current income are quantified.
Beware of "Rules of Thumb"
There are many different rules of thumb available, but in most cases they do not give an accurate value of a business because they are based on an “average business.” Even though most industries have one or more such rules, there are not any “average businesses.” Each business is unique and a particular rule of thumb can be off by as much as 100% or more. The business valuator will be able to decide what the most relevant information about a business is and then make an informed decision about its value.