Knowing the value of your business can help you find the right buyer. Determining the value of your business means considering any losses or debts, your industry, assets and earnings.
Getting the fair market value for your business can help determine your company’s roadmap and your future exit strategies.
1. Understand Valuation
You are probably already familiar with EBITDA, but as a reminder, EBITDA stands for the pure net profit of your business or its Earnings Before Interest, Taxes, Depreciation and Amortization.
Like EBITDA, Seller’s Discretionary Earnings (SDE) help you configure the true value of your business for a buyer. SDE includes the typical expenses you report to the IRS but also figures back in owner benefits and salary.
So, which do you use? Larger business use EBITDA while smaller businesses use SDE, and M&A advisers can help you determine yours. Small business owners typically expense personal benefits. Buyers ask about discretionary cash flow, so be prepared to account for major expenditures.
2. Organize Your Finances
Your M&A adviser can help you determine your valuation, but you must have your finances in order to ensure a smooth valuation process:
- Deeds, licenses and additional proprietary documents
- Profit & Loss and balance sheet statements for the previous three years
- Tax filings and returns for three years
- Miscellaneous financial reports the adviser may need
- A short overview of your business finances
A firm foundation gives you sound and realistic expectations about the value of your business. While the buyer may not reference all of the documentation, you will be fully prepared to address any questions your buyer has when you sell.
3. List Your Assets
A professional adviser can objectively analyze and list out your assets and liabilities. Consider everything that adds or detracts value to your business, from your delivery truck to your intellectual property.
Include tangible and intangible assets so a comprehensive list can be prepared. Intangible assets include such things as patents, trademarks, subscriber base and goodwill.
Generally speaking, the assets used in the business generate the EBITDA or SDE and are not additive to the value of the business. These assets play an important role in evaluating how your business compares to your competitors and the industry at large which ultimately drives value. Liabilities may or may not be included in the sale and include notes and accounts payable, loans, accrued expenses and unearned revenue.
Your business will help showcase accurate projections for market growth and earnings. Your business model shows how you make money. A well-run business makes transferring ownership easier.
4. Research Your Industry
Familiarize yourself with industry trends to determine a valuation that reflects the current market and your business assets. Look to companies with similar business models, revenue and size. These comparables offer more context regarding the sector and your position in the marketplace.
Choose the Approach That’s Right for Your Company
You shouldn’t mix and match calculations to arrive at your final valuation. If using an income approach, you can choose from two methods. The discounted cash flow method determines the existing value of a company’s future cash flow and is best for new businesses with high potential. The capitalization of earnings method also looks to future profitability with its cash flow, ROI and expected value, but established businesses with a stable profit use this method.
Another approach is to value the business completely by assets alone, assigning each asset a monetary value. The adjusted net asset method determines the differences between assets and liabilities, which are adjusted to fair market values.
Finally, the market approach, which is the most common, values a business based on how similar companies have fared in the market.
Valuing your business means that you must consider your industry, assets, earnings and any losses or debt. Organize your finances and list your assets and liabilities, researching your industry with the help of an M&A adviser, as you make your analysis.
A confident valuation empowers you to make necessary improvements and decisions to secure the fair market value for your company. Contact Sun Acquisitions to determine the best approach to achieving fair market value for your business today.