So you’re thinking about selling your business? Congratulations, that’s the first step to a brighter future! But before you jump right in and start listing all of your business’ assets, it might be worth considering what business valuation means.
The business valuation process can seem arbitrary but there are factors that help determine the value of a company. In this blog-post we’ll cover 10 things to consider when planning to sell your business.
1) Evaluate business assets.
Consider the business’ tangible and intangible assets, such as patents or licenses. Also take into account business history, labor force and business reputation.
2) Examine competitive market data.
Take a look at similar businesses in your industry to see what their valuation is like. Important factors include business size, profitability, and commercial activity of other companies in the same sector.
3) Analyze business performance.
Look at the business’ financials, revenue and profit over time to see how it is performing in relation to other companies.
4) Consider potential buyers.
Who are your company’s customers? What do they need? Do you want an investment firm or a strategic buyer as a partner for growth? This will help you understand how to value a business.
5) Be realistic about business value.
Don’t get your hopes too high! The business valuation process is not a sure thing and it may take some time to find the right buyer, so don’t commit emotionally or financially until you have a firm offer in hand.
6) Investigate business capital.
Do your research and be prepared to show that you’ve done all of the necessary legwork before seeking out a business valuation expert. Be sure to make financial projections for at least five years into the future.
7) Look for business buyers involved in your industry.
Partnerships make good business sense, so try to find a company that shares some of the same goals as you do and has the necessary capital.
8) Consider business revenues.
The business valuation process for a company’s value is based on its assets, but the business may also be valued by its revenue and profit margin. What are your goals? How much money does it cost to achieve those goals?
9) Evaluate business operations.
The business valuation process has to take into account the business’ success or failure depending on how well it’s managed and operated, as this impacts its value. You will need to know things such as: what is your company’s operating margin? What are you looking for in a long-term partner who can this type of business?
10) Calculate the business value.
Create a business valuation proposal to present your business’ assets, competitive position and future potential to prospective buyers. This will help you figure out how much your company is worth!
Building a business is hard work.
It’s the culmination of years or even decades spent building everything from your brand to your customer base. When you’re ready to retire, sell off what you’ve built, and take that leap into retirement life, it can be tempting to sense all of the money just waiting for you at the end of that business-selling rainbow.
There are plenty of factors to consider when it comes time for business owners to sell their business, but what is the business worth? Is this business going to be a good investment? If you’ve been thinking about selling your business in order to retire or build another company , it’s important to know the business you’re selling is worth what you think it might be.
A business valuation can help answer those questions and more, so if you are considering selling your business or looking for a buyer for your business, find out how much it’s worth today by using these 4 methods of valuing a business.
1) Market Value
This is the business’ as-is value, which takes into account what your business would be worth if sold to a competitor. It’s also called “fair market value”, and it can either take place of or in addition to other methods of valuing a business.
Market value is calculated by looking at similar businesses that have been sold to competitors.
For example, a business with inventory worth €100,000 and no real estate may be valued at about €300,000 according to the market value method of business valuation.
This includes any debt that is owed on the business as well as assets. The process takes into account fair market prices for goods or services, the business’ current operational efficiency, and other factors to ensure that you’re getting a good deal for your business.
Market Value is an actual value of what someone would pay for this business today in its present condition with all debts included.
If a business has been around long enough and there are similar businesses still operating, the business can be valued by looking at what similar businesses in its marketplace have sold for.
Market Value is a very important tool to use when trying to value your business because it takes into account all of the debts on the business, including loans and mortgages that may need refinancing or paid off before sale can take place.
2) Income Approach
Income approach business valuation looks at the profitability of a business and what it would be worth if sold. It is calculated by looking at the business’ earnings (such as revenue or net income) over some period of time, then dividing that figure by an appropriate multiplier to account for how long it might take you to find another business to buy, as business buyers typically look for a business to purchase that will make money within the first few years.
The net income is multiplied by several different multipliers and averaged together in order to come up with an overall multiplier price of what your business would be valued at if it was sold today.
This method of business valuation is popular because it takes into account how much business owners would have left over to invest in other businesses after selling their business.
The Income Approach business valuation method is a popular one because it takes into account that the business owner may want or need some money for retirement, and there are also expenses like mortgages on real estate or loans on property that will need to be paid off before business sale can take place.
The Income Approach business valuation method looks at the business’ profit over a certain period of time, then divides it by an appropriate multiplier in order to account for how long a business buyer might look for another business after this one was sold. The net income is multiplied by several different multipliers and averaged together to come up with the business’ overall multiplier.
This is a popular business valuation method because it takes into account how much business owners would have left over after selling their business, which they could use for retirement or further investing in other businesses.
There are three types of income: revenue, net income (gross profit minus business expenses), and book value.
The business’ net income is multiplied by several different multipliers and averaged together to come up with the business’ overall multiplier, which will be used when valuing a business during sale or purchase.
This method of valuing a business takes into account how much money business owners would have left over after business sale, which they may want or need for retirement or other business investments.
3) Asset Approach
Asset approach business valuation looks at the business’ assets and how much they would be worth if sold. It is calculated by adding up all of the business’ assets, then dividing that figure by an appropriate multiplier to account for how long it might take you to find another business to buy, as business buyers typically look for a business to purchase that will make money within the first few years.
The business’ assets are multiplied by several different multipliers and averaged together in order to come up with an overall multiplier price of what your business would be valued at if it was sold today.
This method of business valuation is popular because it takes into account how much business owners would have left over to invest in other business after selling their business.
4) Multiple of net income
Once you’ve determined how much business income your business generates, calculate the multiple of net income that buyers are willing to pay for. It’s important to understand what a buyer is going to use this number as in their analysis and negotiation process with the seller.
– For example: if they’re looking at buying a business which makes €200,000 net income annually and they’re going to use it as a business investment opportunity that will generate cash flow (and not enter the business themselves), then they’ll likely be willing to pay for an ROI of 20%. That means €400,000 –
– If instead they want to hire someone who has experience in running this business model and will also be able to generate a cash flow, then they might only pay for an ROI of 12%. That means $300,000
– If the business is currently generating more than 20% in net income annually before expenses, it’s possible that you’ll get offers at higher multiples.
– A business with a business model that is difficult to replicate, such as a web-based business which relies on proprietary technology and skillsets, may also be able to get offered higher multiples of net income.
A business with an ROI multiple between 12% – 20% can generate €300,000-€400,000 in cash when selling their business.
– A business with an ROI multiple of less than 12% is not worth selling, because it will generate less cash (less than €300,000) when sold.
– You must also consider that the business’ net income may decrease or increase over time depending on market conditions and business decisions made by the owners before they sold.
– A business with a declining ROI multiple is worth less because it will generate less cash when sold (less than €300,000).
Whichever route you take to value your business , it’s important to make sure you’re asking the right questions and getting a business valuation from an expert.
Here at Business Broker Spain, we make business valuations easy for you we can assist you in valuing your business and helping you find the perfect business buyer.
Please reach out to us if we can be of assistance or need more information on how business valuation works with our team!