A business valuation is a critical component of a successful exit strategy. Without knowing what your business is worth in the marketplace, it would be difficult to determine a sales price. A business valuation can also help you reveal and tackle obstacles that might jeopardize your sale. Performing a business valuation well before you stake up that “for sale” sign will give you the opportunity to address those issues so you can attract your ideal buyer.
A business can be valued in many ways, but three common methods are:
By using the income approach, future financial metrics are converted into present values. An example of the income approach is the discounted cash flows method. Projected cash flows are discounted into present values to see what your future cash flow is worth today.
The cost approach seeks to determine the how much it would cost to recreate your business from the ground up. This method is often referred to as the “asset approach” because your assets’ market or replacement values less liabilities are used as a basis for determining your business’ worth. This approach is generally considered to yield the maximum benchmark of value.
The market approach bases business value off similar sales transactions. Public sales records about sales of private companies can be used to determine a going rate. Looking to the market is a reliable way to estimate what sales price will be acceptable to interested parties.
Reviewing Purchase Offers
If you have a good relationship with your accountant, they can help you during the negotiation process. If your purchaser takes issue with the asking price, your accountant can present the testing results that support your valuation. And when an offer is good enough to be considered, they can analyze the offer to be sure it is in your best interest.
Some purchase offers are for buyouts over a period of years. If your exit from the business is gradual, you may want a buyer whose current business practices complement yours. In this instance, your accountant can look at the acquiring company’s processes and controls to see if they will harmonize with your current operations.
Choose an Expert
Landmark has business valuation experts on staff to prepare small business owners for their exit. We can also help you during the negotiation process by reviewing terms to determine the potential impact of the planned sale on your tax situation. If you would like to learn more, contact us soon. We look forward to hearing from you.