So, you’ve reached the stage in your life whereby you have grown your business from the ground up and are ready to look into ways to make an exit that can satisfy both your needs and those of a prospective buyer. First of all, good for you…not many people can say they’ve reached this sort of milestone in life! However, with such a monumental action comes some pretty monumental legwork ahead of you, not least of which is attempting to value your business.
As part of our tips for small business owners section, in this article, we’ll delve into how to estimate the exact worth of your business. While you will have plenty of other steps throughout the process, this post will focus exclusively on the valuation stages so that you can proceed onto other vital parts of a sale safe in the knowledge that you aren’t underselling your enterprise.
Consult With Industry Experts
Just because you might be a captain of industry in your respective field doesn’t mean you will understand the intricate ins and outs of business valuation. In fact, this topic is so rife with nuance that failing to consult with those who are in the business of doing so could put a severe dent in the final tally.
Moreover, you will miss out on the opportunity to tap into the consultants’ typically extensive network of buyers and sellers that can massively expedite the overall process. For example, Hedgestone, an industry expert, states on their website at www.hedgestone.com/category/business-evaluations that they have both domestic and international buyers interested in a variety of industries. This roster of domestic and international clients makes it easier for a consultancy like theirs to provide an accurate picture of the overall market, thus giving you what they consider a fair price. However, regardless of whether you go down this route or otherwise, there are still some fundamental points that need addressing.
Identify Key Financial Indicators
Estimating the exact worth of your business requires careful consideration of critical financial data. While valuations are part art and part science, understanding metrics like revenue, profits, cash flow, and future growth potential helps paint a far clearer picture.
A closer look at things like assets vs liabilities (more on this point later) helps establish a baseline valuation that you can then use when dealing with prospective buyers. You can either do this in-house or hire consultants such as those mentioned in the previous paragraph, who are often better versed at this task than your in-house team might be.
Watch this video to learn more:
Evaluate Market Trends And Competition
When it comes to business valuation, it’s not only about the raw data both current and historical. If you really want to boost the amount you end up with, it’s prudent to include reports based on market trends that could positively affect your business. Just keep in mind that while analysis may show good news, it can also turn up negative issues that might dampen operations in the future and which will almost certainly reduce the final valuation.
Nonetheless, having an accurate read on the competitive landscape is essential. An updated competitor analysis reveals your strengths and weaknesses against rivals. You must know where your offerings differ and how you can carve out profitable market share.
Calculate Asset Value And Liabilities
As mentioned briefly in the second section, calculating your assets and liabilities is a key step in determining true worth in terms of raw numbers. Beyond revenue and profits, potential buyers want to understand the balance sheet. Tangible assets like equipment, facilities, and inventory hold clear market values based on current replacement costs.
However, intangibles such as brand recognition, client lists, or proprietary technology require more careful consideration. Their contribution to cash flows merits reflection. Meanwhile, current and long-term liabilities must be fully enumerated. Additionally, it includes not only debts but also outstanding contracts, leases, taxes, and even possible contingencies like lawsuits.
Determine Cash Flow And Revenue
You may have heard the term: cash flow is king, and since you have been operating a successful business, you likely can see the idea behind the term! For business owners seeking to place an accurate value on their company, determining cash flow and revenue streams is paramount.
At the end of the day, valuation often comes down to the bottom line – how much money is actually coming in and what the potential for future income is. Armed with multi-year cash flow statements and well-reasoned revenue projections, owners have solid footing to justify asking prices to potential acquirers.
Watch this to learn more:
Analyze Historical Financial Data
Owners must understand revenue and profitability trends, paying close attention to periods of growth and decline. Assessing how effectively the business has been managed financially in the past offers insight into future potential. This performance track record helps set appropriate valuation expectations and gives buyers a critical perspective when considering price.
To Conclude…
Establishing a fair value for a firm is a complex undertaking because it considers numerous factors and data. However, understanding these indications is the first step. If you believe you are unable to complete this task on your own, countless reputable consulting firms are willing to assist you.
