If you run a business, it makes perfect sense always to have a good idea of what it’s worth. Most business owners only consider their business’s value when they’re preparing to sell. However, an overview of the company and what it could be sold for can bring numerous benefits.
One of the best reasons to have your business valued beyond a potential sale is to understand where you stand in the face of competition. Whether you’re new to a market or have worked on a business for decades, it is always worth understanding how your company is perceived among consumers, especially those that prefer to work solely with the most successful.
The greater your business’s value, the more collateral you have for borrowing, the greater your data for future plans and strategies, and the better you can protect it with insurance.
In short, it’s worth knowing what your business is worth at all times. Then, if you decide it’s time to put the company up for sale, it becomes essential.
A Wealth of Valuation Options
Some say that a business is worth whatever someone is willing to pay for it. While there’s merit to that statement, there are far more accurate means of determining what your company is worth on the open market.
Fortunately, there are various ways to value a business. So naturally, whichever option determines the company is worth the most will be the most attractive in most cases.
The following are the most common means of determining an overall market value:
If your business owns tangible physical or intellectual properties, an asset-based valuation may be ideal.
The benefits of such a valuation include increasing what your business is worth through what it owns. These assets might consist of land, buildings and factories, equipment, and anything else along those lines. It also extends to non-tangible yet valuable assets, such as patents and trademarks.
The downside to this valuation method is that it is impossible to attach financial worth to some parts of the business. Strong customer sentiment, a reputation for going above and beyond, and goodwill are nearly impossible to work with using this valuation method.
Ultimately, this method values your business at your assets minus your liabilities. Unfortunately, it often results in valuations at the lower end.
Revenue and Earnings
When buying or selling businesses, money quickly becomes the most critical consideration. Virtually nobody buys a company intending to make less in the coming years than the firm has made in recent times.
If you have a strong track record of profitability, your price to earnings (P/E) ratio might be the best available valuation tool.
Your P/E ratio is available in your accounts. However, assigning a value is more complex. Valuations can commonly take the ratio into account before multiplying them between four and ten times over.
Seller’s Discretionary Earnings
In the simplest possible terms, discretionary earnings are how much a single full-time business owner could expect to earn from the business each year. Smaller companies tend to favor this model, especially those that bring in under $5 million each year. For those with higher revenues, EBITDA is often utilized in its place.
Seller’s Discretionary Earnings, or SDE, are always higher than EBITDA as they use the adjusted EBITDA figure before also adding in owner compensation.
The “discretionary” element stems from expenses. Many companies attach costs to the business when the result is of personal benefit to the owner. As a result, this method could incorporate the owner’s insurance, corporate memberships, travel and entertainment, and much more.
This valuation method can go both ways. Some potential buyers will feel that the owner spends more company funds for their own benefit than they might. Others will happily deduct those numbers in favor of adding them to the company’s balance sheet.
One potential valuation method often overlooked by businesses is the cost of entry into their current market.
Some businesses are unique, in which cases the entry cost is higher.
Others, especially retail businesses and service providers do what many other companies do. However, it is how they do it and their reputation for doing it well that can make a difference to the valuation.
Widespread positive reviews, extensive potential leads, and even social media followers can add value to any business valuation. But, of course, they can be challenging to assign an actual financial value to.
Understanding the Sector
Whether you value your business yourself or enlist professional assistance, it’s vital to understand the sector. For example, a retail business with physical premises will incorporate different considerations to a company based around a central website.
With that said, most valuations come down to past and current performance, together with any growth potential. If your business operates in a growth sector, a potential buyer may be willing to invest more today to receive those increased future earnings.
Boosting Your Valuation
An oft-overlooked but relatively uncomplicated way to boost any business’s valuation is to select the correct valuation method. As noted, asset-based valuations are often the lowest unless a company has nothing more to offer.
The SDE method is often highly reliable but may lead to further questions from a potential buyer. It’s worth taking the time to explore all available options, along with cutting costs in the lead-up to a sale, to ensure that the final sale price covers all the positives a company brings. If you want to sell your business quickly, you might not have time to explore every option, but if you want to know what your company is worth and are ready to wait for the right buyer, there are numerous factors to explore.
One of the most challenging aspects of deciding what your business is worth is that you live it daily. However, you’ll be well aware that it’s easy to get comfortable and even complacent with your company even throughout everyday operations.
A fresh set of eyes can be ideal for achieving a realistic valuation at the upper end of what’s possible.
That’s just one of the services we provide here at 1-800-BIZ-BROKER. We’ve been selling businesses since 2006, and our team boasts more than a combined 50 years of experience in transferring companies from one party to another in a way that leaves everyone delighted.
We can put all that experience to work, so you know what your company’s worth, and take things a step further by finding buyers and managing the sale on your behalf if you so choose. So schedule a call today to find out what your business is worth and how to get the best possible price on the open market.