The decision to sell your business is a bittersweet professional, and personal, turning point. All the years of ceaseless hard work, shrewd decision-making, and personal self-sacrifice, culminate in the sale of your life’s work.

Once the decision to sell the business has been made, how can you determine the best approach for determining how much your business is worth?

To begin with, ensure that your financial records are well organized and up-to-date. It is crucial to dedicate ample time to prepare before engaging a business broker to oversee the transaction. Numerous aspects require careful consideration, including employee contracts, lease or equipment rental agreements, and supplier contracts.

Business Valuation

Bringing in a certified business valuation consultant is prudent. It is important to note that a business broker and a certified business valuation consultant are not necessarily the same person. In fact, to avoid any conflict of interest, you should consider hiring a third-party certified business valuation consultant to review every aspect of your business’s assets, liabilities, financials, agreements, and contracts. A business valuation consultant will evaluate each part of your business’s worth with a clear and unbiased objective. The report they produce includes detailed information about every aspect of your business, including years of operation, the value of tangible assets (real estate and inventory, for example) and intangible assets (your brand presence, C-suite stability, customer lists and information, intellectual property ownership such as trademarks and future revenue projections, for example), as well as what similarly situated businesses are worth in the market in your area.

For most business owners, the valuation report usually has an eye-opening effect; often, areas of improvement will be brought to light, which you will want to take the time to remedy. Doing so has the effect of increasing the value of the business. The report will be useful for your business broker on how to best position the sale of your business for a fair deal, because what a business owner thinks their business is worth and what a buyer thinks a business is worth, and is willing to pay, are two different things.

The report will also interest your banker, especially when there are loans to be paid off. Additionally, your accountant, financial planner, and attorney will all want to know how this pivotal next step will affect your finances, lifestyle expectations, and estate planning, respectively.

There are three standard methods to determine the worth of your business. Each method has its own characteristics, benefits, and limitations.

Income Approach

The income approach focuses on the potential income or cash flows that the business is expected to generate in the future. It values the business based on its ability to generate economic returns for investors. The income approach is considered a robust valuation method as it directly links the value of the business to its future earning potential. It provides a comprehensive view of the business's financial performance and prospects. This approach is particularly suitable for businesses with stable cash flows and a well-established track record. This approach heavily relies on future projections and assumptions, which can be challenging to accurately predict. It is sensitive to changes in growth rates, discount rates, and assumptions about the business's future performance. Additionally, it may not be suitable for businesses with volatile or unpredictable cash flows.

Market Approach

The market approach determines the value of a business by comparing it to similar companies or comparable transactions in the market. It relies on the principle of supply and demand in the market and considers the prices at which similar businesses have been bought or sold. The market approach provides a valuation based on actual market data, reflecting real-world prices paid for similar businesses. It is relatively simple to understand and implement, especially when there are publicly traded companies or recent merger and acquisition (M&A) deals that serve as comparables. This approach can be useful when valuing businesses in industries with active M&A or public markets. This approach relies on the availability and reliability of market data on comparable companies or transactions. Finding truly comparable businesses can be challenging, especially for smaller or niche companies. Market conditions and investor sentiment can also impact valuation multiples, making them subject to market volatility.

Asset Approach

The asset approach values a business based on its underlying net assets or book value. It considers the value of the company's tangible and intangible assets, minus its liabilities. The asset approach provides a floor value for the business, as it focuses on the value of its tangible assets. It can be particularly useful for asset-intensive businesses or those with significant tangible assets, such as manufacturing companies. It provides a conservative estimate of value, especially in cases where the business is underperforming, or the market conditions are unfavorable. This approach may not capture the full value of the business, especially if it has valuable intangible assets (e.g., brand, intellectual property) or future growth potential. It doesn't consider the business's income-generating capacity or market demand, which may undervalue the business. Additionally, the book value may not reflect the fair market value of the assets, particularly if they have appreciated or depreciated significantly since acquisition. Regardless of how you determine the value of your business, it's worth noting that valuation can be a complex process, and each business may require a tailored approach based on its specific characteristics, industry dynamics, and available data.

The Exit Process

After you have the valuation report from a certified business valuation expert, you need to determine if you will engage the services of a business broker. It might not be necessary to use a broker if you are selling to a family member or an employee. Otherwise, securing the protection and advocacy on your behalf that a business broker provides is a wise decision, and standard practice. Good brokers prequalify potential buyers, so you know that getting the best price for your business is a strong likelihood. The broker will also insist on the nondisclosure of your tax returns and other documents. They understand that your personal wealth relies heavily on a quality sale and will guide you toward making a sound, and profitable, decision.

A broker knows which questions to ask a potential buyer. For example, is the bank’s financing commitment acceptable for the transaction? Is the purchase price guaranteed? Will an installment payment have an impact on sales? What else must be contended with in the contract? A broker may not be a lawyer, but a reputable broker will have several astute business attorneys available to get involved in negotiating the finer points.

After a qualified buyer has made an offer, a comprehensive sales agreement must be drafted and reviewed by the seller’s attorney before being presented to the buyer.

Selling your business can be an emotionally charged event. To help mitigate any distractions of this nature, follow the steps above and rely on the expertise of consultants to guide you toward a fair deal for your business.

Check out our Value of Your Business calculator to experiment with different scenarios and determine what your business may be worth to a potential buyer.

For more information how selling your business impacts your business loans and bank accounts, please reach out to a Cambridge Savings Bank business banker today.