Whatever someone is willing to pay.
One of the most common questions business brokers are asked is “What’s my business worth?” Then, right after giving an opinion of value, the broker is confronted with a second question: “How long will it take you to sell it?” A wiser would broker would have addressed the time-frame for selling first. Why? Because what good is a valuation of your business if the time-frame for selling is never?
What if the one person critical to the businesses’ success is no longer able to continue with the business and it needs to be sold tomorrow? It’s probably going to sell for a great deal less than what the broker just said (if it ever sells at all).
What if prior to ever offering the business for sale, we clean up the financials, organize the documentation, optimize the use of assets, and groom the management of the company? You may be able to sell your business for twice what the broker just said.
To understand the value of your business, let’s consider what a buyer gets when he buys your business.
1. The Assets
The first and easiest things to understand are the tangible assets that will transfer to the buyer. Obviously, these are net of any liabilities that transfer to the buyer.
2. The Transferable Goodwill
The item that is most likely driving the purchase is the financial performance of the business. How will the business continue to perform after transaction is completed? The transferrable goodwill is the goodwill that remains after the seller is gone.
3. The Associated Life Style
It’s assumed the new buyer will operate the business in a similar fashion as the previous owner. If not, the projected earnings need to be adjusted (lowered) to account for operational changes. Will the buyer expect to work 60 hours, or 80 hours, or 20 hours each week to continue the business?
Now that we know what’s for sale, how will that be valued by buyers? Given the above list, the buyer will evaluate the business based on how he expects to continue the operation of the business once the transaction is completed and how the associated assets and life style match up to his personal goals and objectives. If he’s unemployable and looking to buy a job, working 50-60 hours/week may be perfectly fine. If he’s making a strategic acquisition and has no intentions of operating the business, that deal is already dead.
CBankston provides real-world exit planning that models the actual sales process. This includes a mock buyer/seller meeting(s), a mini due diligence period, an analysis of a buyer’s access to capital, and a presentation of findings. The value of this methodology is three-fold.
First, you get to experience the sales process.
Second, you get a hands-on understanding of the due diligence process.
And, third, you receive a presentation of findings that gives you an understanding of how your business will be valued and what concerns may arise during due diligence by the buyer and underwriting by the lender.
After completing a simulation of the sales process, we can now decide what is needed to prepare for exit, how to target qualified buyers and the length of time to expect for completion of the sales process, due diligence and funding.
It is inevitable, one day, your role in the company will change or cease. Because exit preparation and completing the sale of your business could easily take two or more years, is there any reason you wouldn’t want to understand the valuation of your business sooner rather than later?
Contact us today to schedule of free consultation of how your business will be valued by buyers.