Fair Price Valuation When Selling Your Business

selling your business

Fair Price Valuation When Selling Your Business

When placing your business on the market, it is crucial and imperative to correctly valuate your business accurately. The buyer will know and understand that you are looking to profit from the sale of your business and may even acknowledge this openly during negotiations. However, any sensible businessman will balk and walk away from an absurd price tag. In this post, we will cover the methods that a seller must use to properly valuate their business.

Asset Value of a business is what its tangible assets would likely bring on an open market by a willing seller to a willing buyer, neither acting under duress.  A company’s Asset Value bears a close relationship to its true value only when its cash flow isn’t sufficient to justify appreciable “goodwill.”  Tangible assets are current inventory, furniture, fixtures, equipment, and leasehold improvements.  Leasehold Improvements are work and additions to the leased property that cannot be moved, making it an asset when the business is sold.  The assets are included with the sale of the business with a positive cash flow at no additional cost, as they are considered to be necessary for the shown profit and adjusted cash flow.  Sometimes buyers are willing to purchase the assets of a business not showing a profit, as they have a plan to turn the business around or use the assets in another business. 

The company, as a going concern, derives value from its ability to generate positive cash flow.  An analysis is made using financial statements from the previous three years, including adjustments for such expenses as the owner’s salary, interest, non-recurring expenses, depreciation, personal benefits and any expenses deemed unnecessary to the successful operation of the business.  You will also want to see the current financial statement.

Several methods are used by business brokers to help determine the value.  Some factors used when calculating these methods are competitive environment, industry outlook, depth of management, financial track record and return on investment when compared to safe, passive investments.

Finally, some other factors to consider are the history of the business, personnel, market position, business plan, condition of equipment (must be in good working condition at closing), location, amount and terms of lease, years in business, client list, eye appeal, reputation and competitive situation.  Do your research and make sure a large competitor who could take many of your customers, is not going in just down the street.  Start with a business broker to get a marketing packet with the basic information.  From there, get the financial statements and crunch the numbers.  Prepare the pro-forma financial statements and make sure the numbers work for you.

If you’re ready to sell your business, these steps are necessary, and will help you find a broker with years of experience to help execute your sale. A great way to begin this process will be to contact Moche Hazout at Transworld Business Advisors today!