Selling Your Business? - Know What it's Worth

October 2022

What is a Valuation?

When selling a business, the valuation is an asking price justified by the methods used to determine that price. Knowing the actual value is an owner's first step toward selling. There are standard methods as well as proprietary tools of valuation. A mix of tools and methods that align with the sales strategy determines a comprehensive assessment and arrives at the right price. 

First Choice Business Brokers-Richmond delivers a trouble-free experience for buying or selling businesses.

Why do you need a valuation? 

For this blog, the reason for valuation is to arrive at an accurate price when selling or buying a business. With many factors taken into account, the valuation considers metrics of; assets, goodwill, customer base, location, brand, reputation, and more. Valuation positions the business within the market and provides a platform to begin negotiations.  

Valuations  completed at different times in the business life cycle may be requested during due diligence of the sale: 

● Informed decision making
● Partnership changes
● Tax and estate planning
● Bonus plans
● Stock ownership plans
● Making charitable donations

Read: 10 Questions to Ask Before Selling Your Business

Three Standard Valuation Methods

Highly educated and skilled professionals have spent years learning about valuations and honing this skill of selecting strategies and tools for successful valuations that hit the mark. These are proprietary methods.

There are standard valuation methods. But no one method will perfectly represent the total value of a business. For this reason, several methods combined arrive at the actual value in one document, sometimes called the Football field (because the final graph resembles a football field). 

For a basic understanding, let's examine three standard valuation methods:

1. Multiple-based approach; (also known as the market-based approach)

The multiple-based approach is a ratio, one number over the other. For example, the PE ratio is the price per share divided by earnings. 

Price per share
____________

Earnings

In short, this method compares what your company is worth relative to other similar companies in the same market. 

Pros: it is fast and easy to do. 
Cons: it is hard to find good comparables that match apple to apple. 

2. Discounted Cash Flow;

A DCF is a valuation method that estimates the value of an asset today based on its future ability to generate cash flows. Also referred to as an intrinsic valuation method, it is independent of external factors and relies on the company's ability to generate cash flows, considering the time value of money discount. 

This valuation method works for all types of businesses, large or small, as a reliable valuation method. DCF differs from the Multiple-based approach because it does not consider factors outside the company.

Pros: it does not depend on external factors that are hard to identify
Cons: it is time-consuming and heavily based on assumptions.

3. Cost Approach;

The replacement cost approach is often used to evaluate real estate, but not so much in finance. It says the business should be the cost to replace it with an equivalent new one. So, for example, if your factory burned down, what would be the cost of building a new one? The formula includes replacement cost minus depreciation plus the value of the land it sits on.

Pros: it is easy to do. 
Cons: are that it can be hard to get the exact costs.

Creating a Business Valuation Framework

Valuation is an iterative process that considers many factors to arrive at a fair value: 

-Beginning with Historical financials because the past heavily influences the future. 
-Then, valuing assets; the historical financials help identify the ROA (return on Assets).  
-Assessing management and determining a management premium or discount
-Competition; shaping a view of risk and the company's ability to protect profits. 
-Durable competitive advantages, the more durable advantages there are, the longer a company can earn above-average profits and lower the risk of investment. The opposite is true for companies with little or no durable advantages.

Review Business Performance

It is a good idea to audit business performance when buying or selling. Drawing comparisons with existing businesses can help you get the correct numbers. Also, include previous metrics and trends when calculating a company's performance. The crucial metrics include the price-to-earnings ratio, price-to-book values, and price-to-free cash flow.

Gather Relevant Business Data

When estimating a business value, it is critical to have relevant data ready to be presented. Some important data points include financials, contracts, loans, and agreements, to name a few. All this information should be made available to the person doing the valuation. Creating a checklist can help you go through all the steps without missing anything.

Forecast Business Performance

Unlike buying and selling other commodities, business valuations are different. The seller presents the business's future outlook to potential buyers. The value of a business lies in its ability to accrue future cash flow. You will benefit from having professionals do the job. They have a much more intrinsic understanding of this and can deliver an accurate forecast. 

Handle Negotiation

An inevitable part of every business sales process is the negotiation phase. All parties come together to decide on a price for the business. A daunting task if you're a new buyer or seller without negotiating skills. The key is to ensure that you understand the business valuation perfectly and can answer any scrutiny from the buyer. 

Agree On A Final Value

Once all parties agree on the price, the detailed business valuation report is shared. The information includes the approach used, metrics, and projections stated by the business owner. The valuation process is complete, and the buyer and seller move on to determine the handover obligations.

How Does a Business Broker Assist in the Process?

Business Brokers vary in the services they provide and how the services are delivered. You can explore the benefits and choose the type of service your sales needs: 

-Online formats that offer software.
-A one-person advisor who offers specific services 
-A full-service office with a team of professionals. 

First Choice Business Broker - Richmond NewYork

We Transform the Lives of Business Owners - Are You Next?

First Choice Business Brokers-Richmond delivers the best value for a trouble-free experience when buying or selling a business. 

We are a full-service office with access to the professionals you will need along the way, including; lawyers, bankers, accountants, real estate, and insurance brokers.

Your trusted advisor stays with you throughout the process, guiding you and providing the resources you need at each step.

FCBB has a vast network of potential buyers looking to buy businesses. We pride ourselves on our ability to match buyer to seller.

If you're looking for a professionally qualified business broker in Richmond, call us at FCBB.