Best Practices for Valuing and Selling Your Business
After careful consideration and several conversations with friends, family, and colleagues – you’ve finally come to the conclusion that it’s the right time to sell your company. Whether you’re moving into a different type of business, redistributing capital to another company, or retiring altogether, creating a proper valuation strategy is critical to understanding the value and financial health of your organization.
Determining your company’s value is a complex process that requires analyzing various financial and non-financial factors. You must also account for all tangible and intangible aspects of a company to properly measure and analyze past, present, and future financial viability. Understanding the ins and outs of business valuation will help you determine the fair market value of your company, which is critical if you’re preparing to sell your business.
Why Should You Sell Your Business?
The decision to sell a business, especially a highly profitable one, does not come easy for most entrepreneurs. Business owners oftentimes spend years of their life pouring sweat equity and resources into building a successful company from the ground up. However, there’s a number of reasons why an owner might consider selling their business.
If you’ve spent years running a business, it can be challenging to take a step back and consider selling the company. However, the reality is that all owners – whether it be by choice or necessity must finally hand the keys over to someone else. If the business isn’t passed down to another family member, selling the business to an external stakeholder is often the most logical decision.
Many business owners are born with the entrepreneurial spirit embedded deeply inside them. Once a company is successful and financially viable – they may choose to embark on another business venture. Selling their current company can help them redeploy capital elsewhere by transferring funding to another business.
The Company is Losing Money
Companies are in business for one reason – to make money. Lack of profitability is a common reason an owner may consider selling their business. If an organization has experienced extended financial losses for a number of years, selling the business may be the only logical choice. External investors may be willing to purchase the company at a discount and create an action plan to revive the business and bring it back to profitability.
Owners looking to maximize profitability when selling their company must determine its value using appropriate market valuation techniques.
How to Value Your Business
After making the decision to sell your business, you must establish fair market value in order to maximize financial returns. There are several different methods that can be used to assess financial viability including:
- Asset valuation: the total value of all assets, both tangible and intangible. Equipment, inventory, real estate, stock, trademarks and more are summed together to determine market value. However, this valuation technique is incomplete as most companies are worth far more than the net value of intellectual property and physical assets.
- Historical earnings: this estimate includes a business’ gross income less debt obligations. A company that repays debt quickly with positive cash flows will yield a higher business value.
- Times-revenue method: this figure is based on revenues over a certain period of time and a multiplier used to determine the maximum value of a company. The calculation involves dividing the selling price of a company by the prior 12 months revenue.
- Discounted cash flow method: this figure looks at a business’ annual cash flow. Figures are projected into the future and the value of future cash flow is discounted using a “net present value” calculation.
There are several components when it comes to determining a company’s valuation. Using flawed valuation models or projections can result in inaccurate figures, incorrect assumptions, and unrealistic expectations.
All stakeholders including the buyer, seller, and lender must all work together to ensure the valuation is as accurate as possible. The seller wants to receive fair market value for the business being sold while the buyer wants to have realistic expectations of future profitability and earnings potential. Furthermore, lenders must rely on this information being accurate to streamline the lending process and ensure financial viability for repayment.
Using Accounting Automation for Business Valuation
Docyt uses accounting automation that results in real-time visibility into your company’s expenses, revenue, and profitability. Docyt also continuously reconciles the accounting ledger which means your P&L and balance sheet are updated in real-time. This helps expedite negotiations between buyers and sellers because all historical financial data is accounted for and documented.
If you’re looking to sell your business, an accurate valuation is the key to reaching an equitable agreement more quickly. Docyt can make the process easier. If you’d like to learn more, feel free to visit our website and schedule a free consultation today.