How to value a business for sale is important for those buying a business. It is also helpful for business owners to know what their business is worth. It can be difficult to determine how much a business is worth. Whether it’s a startup or an established company, there are different factors you need to consider when valuing a business for sale. In this post, we’ll take you through the considerations of valuation and share tips to make the process easier. With this information, you’ll be able to make informed decisions about the value of any company.
What is the Value of a Business?
To value a business for sale, you first need to understand its overall value. The total worth of a business can be calculated by adding up all of the assets and liabilities of the organization. This includes everything from cash, assets, and goodwill. Once you have the total worth of the business figured out, it’s time to apply valuation techniques. One common valuation method is “multiples of income,” which uses the company’s income multiplied by an industry-specific multiplier. The multiplier is calculated using recent industry sales data. BRG Business Reference Guide is a source for Rules of Thumb Business Data. The multiplier for most “small” businesses will be between 2 to 5 times earnings. That is a wide range, so I will share some tips below on applying the multiple for a given business.
Tips for Valuing a Business for Sale
1. Use comparable sales prices of businesses in the same industry and similar gross sales and profitability. Some databases can be purchased to obtain this information. However, you can also get this information by going to business-for-sale websites and analyzing their asking price. The asking price is not the same as the sales price. Most businesses sell for 10% to30% below the asking price, so factor this into your calculation.
2. Not all earnings are the same. A company that has consistent earnings over multiple years is more valuable than a company with erratic earnings with wide swings. Sales should also be consistent and ideally growing year over year.
3. If the company is too reliant on one large customer making up more than 30% of the business, it has a customer concentration issue. Companies with a customer concentration issue are less valuable because the business is at great risk should the customer go elsewhere for goods and services.
4. Will the company be able to prosper with new ownership? If the company can’t grow or thrive without the owner’s presence, the company is less valuable and may be worth little with new ownership.
5. Systems and processes should be in place so the new owner can continue operations with little disruption. The business will be less valuable and receive a lower multiple if systems are not in place.
6. The business will be worth less if key employees are unwilling to work for new management. Even a high risk of employee departure is devaluing a business.
7. Aging equipment that will require replacement and a major overhaul will take away company value. Specialized “one-off” equipment that is difficult to repair or replace can also damage company value.
9. Industry is shrinking, or technology is outdated will hurt value. This is a normal occurrence and may not have a huge impact on value if the market is large enough to sustain for many years.
10. A company with patents and registered trademarks will command a higher valuation. Intellectual property and a strong brand will enhance the value of a company.
11. A large, engaged social media following will add value to a company. Active social media accounts can enhance a company’s future sales and keep the brand relevant.
How to Value a Business Beyond The Numbers
To properly value a business, it is important to understand the company’s financials and earnings, but it’s also important to know the history. You should know about the company’s past, current, and potential future state. Understand what motivated the founders and their beliefs when the company was started. Once you understand the company’s past, present, and potential future, it is time to consider that in conjunction with its financial condition. A company with quality earnings and consistency will have a higher multiple than a company with lesser and erratic earnings. Use your judgment to make an informed decision about the business’s value based on comparable sales, financials, rules of thumb, and tips shared in this post. Learn other valuation methods here.