Determining the value of a business is about more than just how much money the business brings in on an annual basis. It involves determining the business’s place in its industry, among other things. Don’t get caught up in just your profits, as they’re only a small portion of where your business’s true value lies. How do you value a business properly? It starts with taking inventory of your assets, your reputation as a brand, and your customer base. Here, we’ll discuss the process of valuing a business in order to get the best asking price and keep the selling process fair and honest. You owe it to yourself and your potential buyers to value your business correctly, so here’s how to do it!
What’s Your Place in Your Industry?
A good starting point for valuing your business is to decide where you fit in with your industry. You can tell a lot about a business by where they stand in the industry. If you’re an expert in your industry, you’re already well-established as an authority, which can certainly be a consideration in your valuation process. An established authority is an attractive prospect for a potential buyer since you likely already have a loyal customer base that trusts your brand.
If you’re not quite an authority, but showing great promise in your industry, you’re also an attractive prospect, since the company still has room to grow and prosper within the industry. Some buyers actually prefer a business that’s on it’s way to the top, because growth looks steady for the next few years and can be increased with new ownership.
If you’re just starting out in your industry, your business would need to show some serious growth potential before a buyer would even consider it. A broker service is a good option when you’re unsure when to start in the process, or you’re not sure if your business is valuable enough to list. Business Exits helps sell businesses all over the country and has a great reputation for service and results.
Assets Vs. Profits
When you value your business, you need to consider both your assets and your profits as factors in determining the accurate value of the company. Most sellers get stuck on whether or not their businesses are profitable, and while buyers certainly want to see certain profitability, they’re also concerned with the value of your tangible and intangible assets.
First, let’s start with your profits. Determining your cash flow and profits isn’t overly-complicated when you know what factors into it. Start with your gross profits for the year. How much money did you make total before taxes and expenses? Once you have this number, calculate your expenses. This includes everything the business spent money on, right down to napkins for the break room. After that, determine how much tax you paid that year, your employees’ and your salary and benefits, and you’ll have an accurate picture of your business’s net profit.
If you’re in the positive, you’ve got a profitable business that could be attractive to buyers. If you’re in the negative, have numerous unpaid expenses, or are drowning in debt, you’re not going to be all that attractive to a buyer. Most investors don’t want to throw money at a sinking ship, and for good reason; the risk is simply too high.
Now that we’ve determined your profitability, let’s take a look at assets. Determining the value of your assets requires that you know what to look for. Tangible assets are things like properties and equipment that you can physically touch or use. How much machinery do you have? How much inventory?
Once you’ve calculated the value of tangible assets, look to your intangible assets. Do you hold copyrights, patents, or trademarks on products or inventions? Do you have intellectual property rights to anything or a very loyal customer base? Customers and brand loyalty can be considered valuable assets to a business, as they’re essentially the heartbeat of the organization, and without either, you won’t be very profitable.
Once you’ve gathered all of this information, you’ll need to put it into a detailed report for your potential buyers. Include your business plan and structure in your report so the buyer can get a better idea of how the business functions and what the contingency plans are. This detailed report is more than just a courtesy to the buyer, it’s your ticket to the best price you can get for the business when you finally sell it. Your buyer will want to know the ins and outs of the business, and they certainly have a right to know. Would you buy something as risky as a business without knowing every detail? (The answer is no!)
Valuing a business requires more than a bit of effort, but your buyers will thank you in the long run, and you’ll thank yourself when you get a great price for your business. You’ve worked hard to get your business to this point, so be sure to take the time to value it properly to make sure you’re getting what you deserve for your efforts and securing your business’s future.