How to Find the Sale Value of Your Business
When is the right time to sell my business? This is an important question in every business owner’s career, though not one that every owner even considers. Whatever reasons you may have for selling your business, you must properly value your business in order to make the most profit and ensure you’re selling to the right investor, owner, or organization. The value of your business will help you set the right asking price, and will also give you an idea of just how well you’ve done over the course of the business’s lifespan. Here’s how to find the sale value of your business, no matter what size it is.
Consider the SDE
The seller’s discretionary earnings, or SDE, can be a major factor in valuing your business. This is essentially your net profit after taxes and other expenses, but for small businesses, the SDE includes the owner’s benefits and salary and a few other expenses. Once you’ve deducted those from your business’s profits, you’ll get a good estimation of what the true value of your business is. Anything you report as business expenses, such as travel or vehicle maintenance, is also factored into this number to make it as accurate as possible.
Once you’ve determined your SDE, you’ll want to provide a detailed report to any potential buyers. Most buyers don’t want to acquire a business that’s drowning in debt or has many high-cost expenses, so a detailed report will tell the buyer everything he or she needs to know about your business’s profitability.
Liabilities like debt aren’t always detrimental to the buying process, but if your business is up to its neck in unsecured debt, you’re probably going to have some trouble selling. It’s important to be careful with your business finances from the beginning, keeping the potential resale value and future monetary gain of the business in mind every time you borrow any money.
The industry you’re operating in will also affect the business’s profitability, especially if it’s currently experiencing a drop in market value. Markets fluctuate and change with time, so the best time to offload your business is when it’s the most profitable.
Measure Your Assets
The business’s profitability isn’t the only factor in your business’s valuation. You’ll also want to take stock of your assets, of which you may have more than you think. Assets are things like property, stock/inventory, machinery, etc. These should absolutely be included in the valuation of your business, especially if you own multiple warehouses, storefronts, or offices.
If you’re having trouble figuring out the value of your business assets, it might be a good time to consider hiring a broker or other professional to help you figure it out. You don’t want to forget assets in your valuation, because you could seriously undersell your business if you factor in profitability only. The goal of selling the business is to get the most out of the sale possible, so don’t forget those assets!
It’s a good idea to create a comprehensive list of these things for the buyer to look at in your report. They’ll want to know where your investments lie, how much cash the business has on hand, and what kinds of materials, equipment, and property they’ll be inheriting when they make the purchase. It’s a good idea to be as transparent as possible here, as any falsehoods could come back to haunt you later.
Know the Difference Between Tangible and Intangible Assets
This is something you’ll need to consider when you’re creating your report. Tangible assets are the things we already discussed: properties, machinery, equipment, inventory, etc; anything you can put your hands on. However, you can also have intangible assets, which are usually things like trademarks or copyrights/patents, intellectual property of any kind, or even your current customer base. Yes, the number of customers and their loyalty to your brand is considered an asset, and one that you should include in your report.
The industry your business is operating in has a much greater effect on your valuation process than you might think. Knowing the patterns and trends that occur within your industry, as well as knowing if it’s currently a buyer’s or seller’s market, can help you determine another important part of the valuation process. What’s your company’s place in the industry? Are you an up-and-comer, or a well-established expert in the industry you work in? This will help the buyer make a decision based on the business’s potential for growth.
Selling a business isn’t the easiest task, but there are hundreds of resources available to the modern business owner to make the process more straightforward. Use a broker if you’re unsure what to do or how to value your business, and be sure to take into account all of your assets; both intangible and tangible when you’re valuing your business.