Once the decision to sell is made, owners need to determine the value of the business to ensure they get the best return on their investment. That’s not always easy, as numerous factors are used to determine value. When establishing a value, business brokers and appraisers consider current profitability, the potential for growth, and a range of market conditions to arrive at a realistic price for the business. Here are a few elements considered when determining the value of a business.
What Assets are Included?
One factor CGK business brokers always consider is the value of all assets included in the sale. Those assets could include any equipment needed to operate the business, the existing inventory, and even intangibles like patents. Of course, the value of any real estate will be included. However, while these assets are certainly important, the value of a business can’t be defined using only one approach.
Current Revenue Levels Impact Value
Potential buyers want to know how much revenue a business generates. This approach to value seems pretty straightforward but isn’t. Overall value is estimated by taking the total annual revenue and multiplying that figure by a specific value. Different types of businesses will use different multipliers. This tool has more validity in some situations than in others and is a good indicator of value but not the be-all, end-all valuation strategy.
Consider Earnings When Discussing Value
Many valuation experts consider earnings multipliers as a more realistic measure of value. Here, the broker will take the price-to-earnings ratio and multiply it by the estimated earnings. For example, if the price-to-earnings ratio is 10 and the estimated earnings are $100,000, the estimated value would be $1 million. Again, this system provides a ballpark figure but is generally more reliable than the revenue level model.
Discounted Cash-Flow Analysis is Also a Viable Option
This strategy is more involved but is frequently used, especially when other strategies are not working well. The formula takes the annual cash flow and projects it into the future. This system then discounts the future cash flow’s value and translates it to a current value. The result is the net present value. Brokers generally use an established template to complete the calculations.
Financial Formulas Don’t Provide All the Answers
One issue business owners, brokers, and potential buyers all have is that financial formulas don’t present a complete picture of value. Other factors are also important and should also be considered. For example, location is always a crucial element. A manufacturing business near material suppliers and transportation will generally be more valuable than one off the beaten track.
Retail business values are also impacted by their location. A business located in an up-and-coming neighborhood will be worth more than the same business located in a declining area. Of course, predicted changes in neighborhoods are also important. If the area is expected to see a dramatic use change, that change must also be factored into any valuation calculations.
Timing is Always Important
Finally, timing a sale is essential. Conditions are always fluid, which means predicting an optimal time to market a business must be factored into any decisions. A broker will help sellers evaluate the current and anticipated market conditions to determine the best time to sell. If you’re considering selling, now is the time to contact a broker for advice. A broker will explain the marketing process, evaluate the various options, and determine the best ways to generate the highest sale price for your business.