How Do I Determine the Value of My Business?
Before you can look for potential buyers for your business, you have to determine how much it’s worth. Oftentimes, sellers have a number in mind they’d like to receive for their business, but that number isn’t usually based on financial calculations. Maybe you consider your business to be your retirement savings, and you need a certain amount.
If you’re serious about selling your business, you need to determine a value that aligns with what buyers will pay for it. This amount is usually based on your average business income and expenses, which can be verified through your company’s financial statements and tax returns.
The BEST Method is to Work With a Professional Business Broker
As a business owner, you can easily overestimate or underestimate the value of your business. You’ve built it from the ground up and you know all the hard work that went into it. Buyers don’t look at your business the same way. Instead, they focus on financial statements, tax returns, and other performance indicators to arrive at a value.
When you work with a professional business broker, they will determine the value of your business based on your financial documentation. They also use benchmarks and comparisons to similar businesses to arrive at a fair selling price. The broker will also bring experience to the deal that can help a seller consider factors in pricing that can improve chances of a sale.
Use a Business Valuation Calculator
You can use the free Sunbelt online calculator to calculate your business value. The tool allows you to use current estimates to arrive at your company’s current valuation. You can even use the calculator to create business forecasts, plugging in artificial numbers to help you with planning your business.
If you don’t need to sell your business immediately, you can use the valuation calculator to formulate your exit strategy. Maybe you plan to improve and streamline operations and increase your revenues for the next couple of years. Eventually, those increased net earnings will help you sell the business for more.
While the calculator doesn’t replace a broker’s experience, it’s a great starting point to understanding how a business is valued and how important your financials are when considering a sale.
Up To Date Financial Statements and Tax Returns
To calculate the value of your business, a potential buyer will ask to see your financial statements and tax returns. An up-to-date profit-and-loss statement, or P&L, provides all the financial information necessary to place a value on your business. Make sure your tax returns don’t differ drastically from your P&L, because this could be a red flag for a buyer.
If revenues have recently increased for the past few months, you might think it will positively impact the value of your company. Unfortunately, that may not be the case. Potential buyers are looking for a steady increase in earnings and value consistency over irregular spikes.
If your business is seasonal, spikes are expected. A potential buyer will still average your net income for the past two to three years to determine the fair value of your business. The most recent spike in earnings could be an aberration and doesn’t predict future revenue accurately.
Ideally, you’ll work with a business broker to help you with all the steps of selling a business. Valuation is an important part of the process, and you want to make sure your pricing is in line with the value of the business. Contact Sunbelt Business Brokers of Naples for a free valuation & consultation.