Four Ways To Value Your Business Before Selling
If you’re looking to sell your business, chances are you’ve already got a ballpark estimate of what it’s worth. However, what you believe your business is worth versus what it’s actually worth can be quite different.
Negotiating the sales price of a business can be very emotional and frustrating for sellers who have invested lots of time and effort into launching their business. Properly valuing your business eliminates this uncertainty and enables you to put an accurate price tag on your business.
Our goal is to provide you with four different ways to effectively value your business before you sell.
The first way a seller can value their business is by conducting a market-based valuation. This valuation method is very simple and does not require you to do any mathematical calculations.
Instead, we compare the sale prices of similar businesses that have sold recently. In doing this, we are better able to gauge the true market value of a business.
This method only works for markets that have publicly listed the sales of small businesses, so if you struggle to find data for your market, you should consider hiring an appraiser who can identify similar businesses that would be good comparisons to yours.
Adjusted Net Asset Valuation
The second way a seller can value their business is through an adjusted net asset valuation. This method focuses on the assets and liabilities of the business and is often used to set a floor price.
We start the valuation by subtracting our total liabilities from our total assets. Then we adjust our assets and liabilities to reflect our estimated market values in our current environment.
A few examples of your typical adjustments include adjusting fixed assets to reflect fair value, adding any undocumented liabilities such as leases, reducing accounts receivable to account for uncollectible income, and adding in both tangible and intangible assets.
The adjusted net asset valuation is very useful for valuing companies with little to no earnings.
Discounted Cash Flow Model
Another way a seller can value their business is by using a discounted cash flow model (DCF). By using the time value of money, we can value what our business is worth today based on how much cash flow it will accumulate in the future.
This model works by taking the businesses’ expected future cash flows and discounting them back to today in order to solve for our businesses’ present value. DCF models are typically used for businesses that are expected to experience long term growth or contraction.
Seller’s Discretionary Earnings Method
The final way a seller can value their business is by using the seller’s discretionary earnings. This method demonstrates how much a potential buyer earns each year if he decides to purchase the business.
In order to determine how much cash we need to operate the business, we start with our company’s EBIT and then add back in the owner’s salary, health benefits, travel expenses, and any other non-recurring business expenses. We add all of these components back because we assume the new owner will decide his own salary and company benefits after the transition of ownership.
The seller’s discretionary earnings method is a great tool and is primarily used to value small businesses but can sometimes cause disagreement over how expenses are added back into the valuation of the business.
If you want to learn more about their difference, learn more about SDE vs EBITDA here.
Let Us Value Your Business
Valuing a business is not an easy process and it’s reasonable to feel overwhelmed by all that goes into it.
We at Tsetserra Growth Partners understand this and are committed to serving as honest business partners throughout the sales process.
We offer a free business value assessment online that does all of the hard work for you, making the valuation process less stressful than it needs to be.