How To Establish The True Value Of Your Business

It took blood, sweat and tears to build the business you’ve created, but how much is it worth to someone else – for instance, a prospective buyer?

As a seller you need to determine what your business is worth and which valuation method makes sense for your situation. Exodus Business Solutions understands the differences and how to apply them to your specific industrial sector.

Asset valuation method

Add the value of your assets and subtract your liabilities to calculate how much your business would be worth if it were to be sold today. This method does not take into account any future earnings potential or any intangible value, such as the goodwill of the business. Goodwill may or may not be transferred along with new business ownership. Goodwill might include the business location or the owner’s personal reputation, or a special relationship with customers. An underperforming business may not have goodwill, so net asset valuation might accurately reflect its value.

Capitalization of earnings or cash flow

The capitalization rate represents the rate of return a buyer would require on an investment when compared to the market rate for other investments that have comparable risks. A buyer would need to determine the annual earnings trend.

Gross income multipliers

When business expenditures are predictable or in a situation where the buyer intends to drastically cut expenses after a business sale, it can be reasonable to base the business value on a gross revenues multiplier. However, this method, along with using a capitalization rate, doesn’t take into account that businesses within the same industry may have differing profit margins, based on expenses.

Assets and Earnings Valuation

The IRS recommends this method, which bases a company’s value on both assets and historical earnings. After calculating the expected returns from your business assets, then compare this total with your historical earnings. If your annual earnings are higher than the return from your assets, the difference is your excess earnings, which can be divided by a capitalization rate.

Attracting the Right Buyer

There are generally four types of buyers in the marketplace and it’s important to consider their motivations for acquiring your business.

Strategic buyers usually are interested in investing in larger businesses, often with revenues over $20 million, and are often attracted to entering new markets that offer new technologies, proprietary processes or products. Most small businesses don’t meet the criteria to attract these types of buyers who are focused on future earnings and market share.

Industry buyers often lack strategic or synergistic motivations for purchasing a business. Their goals are to locate and secure raw materials or products and negotiate the best possible price to benefit their company or organization.

Financial buyers often are interested in cash flow. They have money to invest, and are looking for a variety of different businesses within varying industries. If they don’t have the experience, they may need significant training and assistance from existing management after the sale, which should be reflected in the purchase price.

Corporate, or sophisticated, buyers are an attractive buyer for most businesses. They often take into account future earnings when assessing a company’s value. This financial information should be well-documented with credible and supportable assumptions to attract these types of buyers.

To receive a fair and accurate market value for your business, enlist the support of an expert in the field, like Exodus Business Solutions By hiring a professional to create a detailed valuation report, it demonstrates to potential buyers that you understand the market and your company’s true worth.

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