What is the value of your business? Ask three expert evaluators to come up with a value and there is a good chance they will come up with three numbers that are not close to one another. What is an owner to do when faced with this dilemma?
How did the experts determine the value and why did their final number vary from one another. The reason is simple enough. There are subjective elements to every business evaluation. Each of these experts put a value on the subjective elements that goes along with their personal experience with the business that is being evaluated. This will account for their differences in value. Most business people if they really did get three appraisals would take the highest one and be done with it.
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What is needed to make an evaluation
What do the evaluators need in order to come up with a business evaluation? They need access to all of the financial records of the company. They need an inventory list and value based on whatever method is used to get this number. It is usually first in first out prices or last in last out prices. Both are valid means to value an inventory. Projected sales figures and profit can be used to add some value for the future to a present day value. They will also speak to employees, suppliers and competitors to see how they think the company is doing. They will look at what similar businesses have sold for in the last couple of years and at the state of the present economy. These evaluations will always be based on old information and with an ingredient of future prospects. It is this amalgamation of the old and the possible that causes the range of values from different experts.
Every evaluation needs to be heavily weighted to with future numbers or the price will be set to low. It has to take into consideration the prospects for the company and its future business.
With all of these numbers, the professional will use different methods to come up with a price After this is done, the numbers are looked at and a judgment is made as to what one seems to be the most correct. Again this is a subjective decision.
Comparisons of prior sales in the industry
What have other businesses in the same industry sold for and how do they compare with the business that the evaluation is being done on. This information is very helpful and should make the evaluation a little more realistic. These sales comps will set the tone for how other businesses were rated as to their sales and the selling price It should help in setting an asking price that represents the current value of the company.
Where will the company be in three years
Looking at the growth curve of the business and assuming a similar rate of growth in the future, one could come up with where the company will be in three years. If the growth has been stable for a number of years, there is every reason to think it will continue at a similar rate if no drastic changes are made and the customer base continues to grow. With this in mind, the price of the business should take this future outlook into account.
When this is explained to the buyer, then it must be validated with facts and figures that his advisors can peruse. A well-documented presentation will go along way in alleviating doubts and questions about how you came up with your numbers and the asking price.
Intangible factors to be considered
There are some factors that enter into the evaluation of a business that cannot be reduced to shear numbers and accounting sheets. If the business being evaluated has a significant standing in the industry then this is worth something in the price. If they get a large percentage of the available business that is a plus factor for the business. If its reputation is impeccable then that is another factor that is difficult to put into accounting terms. All of these intangibles when added together make the company more valuable than it would seem to be from just the financials. This is why it is important to investigate and questions others about the company. If the business is the result of one strong individual who will not be there when it is sold, then that could present a problem that could be difficult to overcome. Be very careful about this kind of business.
Intangible assets such as these are hard to put a number on unlike the hard assets of the company. Equipment can be valued at a depreciated value, which could then be used to set a foundation for the final price.
Is there going to be an ongoing need for your business
This one question when answered will help with the question of should you buy the business. A plumbing company will always be needed in our civilization. As will an electrical company. A drywall company will probably always be able to find work. Is the business you are thinking of buying a company like one of these or could its business be done away with without any harm. If the business will always be in demand that is a very strong reason to consider its purchase.
Are there high tech innovations that are going to change the business and you have the expertise to make the change. If this were the case, then you would have a leg up on other businesses like yours. These are considerations with profound affects upon whether you should become the owner of not. If you are able to bring the business into the modern age and take advantage of the new technology then you could make the business grow far beyond what it is today. This is the kind of opportunity that every buyer is looking for and few find.
Conclusions
It is highly suggested that a seller bring in a certified business broker to help with the evaluation, the presentation materials and the finding of prospective buyers for the business. Since this is their business then this is something they usually can do far better than a seller can do it. The broker can help a great deal in the negotiations and the final stages of the sale. They have a vested interest in seeing the business sale go through. The most important thing that they can help with is developing the asking price. After helping to set the price they can come up with justification that will stand the eagle eye of the buyers financial experts. This creditable price is the basis for all other negotiations.
The expert business broker can smooth things along and keep the ball rolling in the move to make the sale. Their knowledge and experience can stop delays from happening and their damaging effects. When negotiations stall, then the sale is in jeopardy. This should be avoided if at all possible.
Bringing in the pro solves so many problems and can lead to a successful sale that is completed quickly and at a decent price. Their value cannot be overstated in a business sale.
Evaluating Your Business For Sale
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Henthorn is president of Spiral Marketers, a marketing firm which includes a number of partnerships that range from cutting-edge software development, business and personal improvement coaching, online e-commerce businesses, and more.
He was formerly was president and principal broker of a resort / commercial real estate brokerage in Honolulu which specialized in representing sellers in transactions up to MM.
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