Selling My Business – How Much is My Business Worth?

Almost all businesses are for sale to some degree. Lets say yours is not For Sale. Assume Your business is worth $100,000. You love what you are doing, someone contacts you with an offer to buy your business for $500,000. Is your business now For Sale? The preceding is not a likely scenario for most business owners. To successfully sell your business planning and preparation is needed. But if you are now or at some point considering the sale of it you may want to consider the following 3 points:

1. Identify your honest interest level when selling your business. Early in the decision process of selling your business consider what approach you may take towards selling it. As a Business Broker in Florida I interact with the various interest levels by small business owners.

  • – My business is not for sale but if someone walks in and offers me way more than what I think it is worth- I would sell it
  • – My business is not for sale but if you run across someone that would want to buy it please let me know. – I want to pursue selling my business but I won’t sell it for less than…( A somewhat inflated price). I am willing to accept that it may take 1-2 years to sell my business, and if priced too high I can accept the fact that my business may not even be sold.
  • – I want to pursue selling my business and after significant due diligence I feel the price I am seeking is consistent to what other like businesses have recently sold for.
  • – I want to sell my business and I want out now. I will set my price aggressively and set a lower price than price currently sought for businesses similar to mine. I will expect this aggressive pricing to both help me sell my business and decrease the amount of time it will take to sell my business.

If you do have a true interest in selling your business as suggested in above last 2 points you do need to exercise due diligence to gain understanding of what the value of your business may be.

2. You can expect that the perceived value of your business to you and the value of the business to a potential buyer will probably be 2 different values.

  • – Ultimately the price of your business is what a willing and able buyer is prepared to pay to buy your business.
  • – Seek “reasonableness” to your price that you will seek to sell your business for. If similar businesses to yours are sold at 1 1/2 times adjusted cash flow, why is yours worth 3 times adjusted cash flow? – Ask yourself what you honestly would pay to buy your business
  • – Do a free Search on my website or other similar websites to find out what similar businesses to yours is asking to sell their business for. Remember – all businesses are different, but use such a search as part of your due diligence. A business for sale asking price and the price a business sold for can be greatly different, but asking prices can provide some basis-while current Businesses Sold information is more pertinent
  • – Speak to your trusted advisers. A business broker may be able to help with non-public info on sold businesses in your area. Your accountant or attorney also may or may not be aware of such sales as well. A Professional Business Valuation specialist may benefit you.

3. Whether it is part of your exit strategy to sell your business or not, you should have an exit strategy.

  • – Most small business owners do not have an exit strategy.
  • – If you own a business you should have an exit strategy. Do some planning, perform some due diligence. Know what you have or may have.
  • – Even if you are not planning to sell your business there is value in knowing approximate value of this potentially large asset. You know what your house is worth, you car, your other assets. Understanding the value of your business can be a significant piece of information when planning ahead.

Selling ones business can be a rewarding experience when done properly. Understanding a proper value for your business can set the stage to a successful sale of your business or a business that is unable to find a willing and able buyer.

What’s Your Business Worth?

At least once a week a dealer will ask me what I think his business is worth. A business broker friend of mine tells his clients that “your business is only worth what someone else is willing to pay for it … and that may be a whole lot less than you thought.” Concerns over decreasing values of wireless businesses are real but don’t have to be cause for panic. Unfortunately, the days of getting multiples of revenue with a cursory glance of the balance sheet are gone.

The failure of so many “dot-coms” has given new meaning to the words, due diligence. The process has become much more complicated and the computations much more intricate. The factors that now determine the overall “worth” of a business in today’s climate reach well beyond the scope of the businesses’ bottom line.

Our organization doesn’t sell businesses, but we do help them get ready to sell. The good news is that there are steps you can take to dramatically increase the value of your business. The criteria and questions below represent a great exercise for all businesses, regardless of whether they are considering looking for a buyer or not.

We find that most businesses don’t really know the answers to a lot of the questions, but some can quickly double or halve the perceived value of their business in the mind of a potential buyer by putting some relatively simple practices into place. These items are critical to the overall health of the business. When someone asks us to help a business increase its net worth, we begin by looking at the following areas:

Profit & Loss Statements

Most financial analysts will look at the “quality” of your data and “trends” over the last two or three years to determine if your business is on the rise, or on the”demise.” First they’ll look at the bottom line to see if there is one. Then they’ll look for trends, and most importantly, if your net profit as a percentage of revenue is rising or falling. The final test is to determine if the percentage is healthy enough to make a buy recommendation to a potential purchaser.

Portfolio of Products and Services

Do you have a mix of products that makes sense for your business? Is each category profitable? Some dealers think they need to carry every wireless carrier to be able to serve the needs of every customer that calls or walks in. This is more often than not a very unprofitable way for a dealer to go to market. Instead of having an outstanding relationship with one or two manufacturers or carriers, they diversify their business to the point of having very little leverage to negotiate or receive additional support because they demonstrate no loyalty in return. In most cases, we recommend that dealers pare back the number of products and carriers they represent as a means to INCREASE their sales and profitability.

Expenses

Are your expenses in line with revenues? A major red flag goes up if your trend shows expenses growing faster than revenues. This signals trouble to potential buyers. Look at your key expenses as a percentage of revenues and compare them with the last two years. Keeping fixed and variable expenses in line is critical to business valuation.

Revenue Areas

Today, most buyers are interested in businesses that are growing. If your sales and margins have been steadily increasing, you pass the first test. Next comes a look at whether your manpower levels are appropriate and productive. Retention and experience counts too, as expertise is valuable to both customers and buyers of your business. What are your “costs of sales” as a percentage of revenue? There are a lot of things you can be doing to drive sales up in your operation from providing sales training to performing sales meetings. A management and motivation process similar to the popular CDI Beat Your Best(TM) program demonstrates structure, measures results and adds value.

Customer Base

One of your most valuable assets is your customer database. The number of “active” customers and the average value of a relationship over time are key ingredients for determining the “worth” of a business. Thus, the business with processes and procedures for maintaining and growing customers over time are worth more. These are some of the most important criteria for determining a business’s worth and we could certainly spend a lot more time on each category and how to build it. Other items such as fixed assets, real estate, infrastructure and recurring revenue streams are also important considerations. This outline will provide you with the basis for creating a written plan for improving each one of these areas. Buyers today are a lot more critical about the value they place on your business. The more you can do to impact each of these areas, the more your business will be worth to a potential suitor. As my friend says: “Your business is worth exactly what someone else is willing to pay for it.” Now that you have a better look at what someone else will see, “what’s your business really worth?”

How Much is a Business Worth?

How Much Is a Business Worth? A Business Valuation Will Tell You

So you’ve finally found a business that interests you, it’s time for a business valuation. Remember a business is worth only whatever someone is willing to pay for it at a given point in time. At this point that someone is you!

Why Do I Need to Do My Own Business Valuation?

The business valuation is one of the most important steps in determining whether you buy this business or not. If the Seller’s broker or an outside source has created a valuation report, fine. Get a copy but don’t put a lot of credence in it us it as a guide line. You still need to do your own evaluation.

Remember, the Seller’s accountant has been trying to save the Seller from paying as small an amount of taxes as legally as possible. What shows on the bottom line for tax purposes, in most cases, are not the true earnings of the company. neither does the balance sheet show true market value of the company’s assets because he has been depreciating the business.

Ok, What Do I Need For A Business Valuation?

The following documents are critical for you to do your business valuation.

1. Profit and loss statements for three years, created by an accountant, not created on the seller’s computer.

2. Balance sheets for three years.

3. Federal Tax Returns (IRS) for three years.

4. Interim financials and balance sheets for the most recent reporting period.

5. Complete list of equipment, furniture and fixtures assigned market value.

6. Recent evaluation reports if any.

7. Appraisals on business assets.

8. Marketing and business plans including financial projections.

9. Brochures.

You have gathered all the information you will need to make a buying decision. You are now ready to…

Start Your Business Valuation of The Seller’s Business.

Remember, most businesses are managed in a manner to pay as little income tax as possible to the owner, not to see how much taxes they can pay. That’s why it is important to get a true financial report. You do not have to explain to the Seller why you are reconstructing the financials.

This is a very critical process to decide the worth of the business you are proposing to purchase. If you don’t feel comfortable, get some help.

Some Sellers will have already have done this, that’s okay, but you still want to do your own reconstruction. If the Seller presents you with a business valuation report with the financials reconstructed, watch out for overstated add backs or those items that can’t be verified. You only use numbers that can be verified from the financial information you have gathered yourself.

Things to Watch Out For

Sometimes, in an all cash business, the owner will not report all of his income. I do not listen to Sellers who want to add value to their business from unreported income. I tell them, too bad! The Seller either pays the piper up front or he pays when he sells. I figure if he will lie to Uncle Sam, he’ll lie to me. This should be a red flag.

This profit and loss reconstruction is the major factor in you determining the true worth of the business. You need to discuss each cash flow item with the Seller. You can do this in person or over the telephone. Don’t make a big deal out of this, but do get the information.

If the Seller asks why you need this information, tell him the truth. You are reconstructing his financial statements to show a true market value of his business. Many Sellers are hesitant to discuss some of the perks they have paid themselves. They probably have expensed items that were totally for personal use. These are the items you are trying to locate.

You will use this information only to justify the numbers you find through your reconstruction of the financial statements. You need to make the Seller feel comfortable in discussing these expense items. Assure him this kind of information stays with you and him only.

This process will help you determine the available dollars for you to service the debt, pay yourself or a manager, and give you a reasonable return on investment.

I know what you’re thinking…

This Sounds Complicated And I Need Help!

My book,Who Wants To Be the Boss?, has a whole chapter devoted to business valuation.

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