Business valuation to sell a Business
How to use a business valuation to sell a business is an important tool all business sellers need to know. If you add a new product or service and it adds to the bottom line, wouldn’t you like to know the affect on the value of your business? Conversely, if a product or service is no longer in demand, wouldn’t you like to know how it’s affecting the value of your business?
It’s also important that you know the value of your business so you can use this information to run and thereby increase the value of the business and why when it’s time to sell, you get the highest price possible. There are many reasons for this suggestion. Here’s a few of them.
- For the business valuation to be accurate it means collecting and inputting valid information. Many business owners don’t like the process of compiling and reviewing their financial statements as it takes them away from doing other things. However, the financial statements are the life blood of the business and are critical documents when the owner decides to sell. Making sure these documents are accurate so the business valuation is accurate is simply good business.
- To underscore the last point, the quality of the financial statements will be critical when selling a business. Obviously the buyer will want to check these documents in great detail as part of their due diligence. Just as importantly, these documents will be used by third party lenders to decide if they will or will not lend against the business. If a lender is not willing to offer a loan then the seller will need to provide any finance short fall of a buyer and its only an inexperienced buyer that would be willing to pay all cash for a business.
- Most business owners’ expectation about the value of their business is completely wrong. The business owner is far too close to their business and if they want to sell their business for the price they need in order to retire, a business valuation is critical to help them know when they can start the selling process. I’ve done business valuations for business owners whose valuation was out not just a little but a lot. For example, one business owner thought the business was worth $1,000,000 but its appraised value was $110,000. Similarly, one business owner thought the business was worth $12,000,000 but the valuation came in at $1,075,000.
- A business is in constant motion and if healthy, should be changing and adapting as both the economy and its products and services change. Having an accurate set of financial statements to show what and where sales are strong while knowing what is and isn’t selling can make or break the survival of the business.
- One of the benefits of owning a business is that you are able to deduct and therefore lower the amount of tax you pay by including some items that are not part of the business. Similarly, the price or cost of some items may not be at ‘normal’ or market rates so an adjustment is required to make sure the value of the business represents a true amount. For example, a business owner may be paying a spouse or children that don’t work in the business so this can be added back. The owner may own the building the business operates from but the building is not part of the sale but the rent being charged and appearing on the financial statements may not reflect a true market rent and therefore need adjusting. The business owner may pay a wage or salary to themselves that is way above or below market rate and so there are many options which all need taking into account.
- In addition to making sure the Income Statement or Profit and Loss Statement is accurate so the business valuation is correct, so too is working the Balance Sheet. I recently sold a business where the bulk of the value was tied up in the inventory. The business had been around for generations and was a wholesale distribution company. Thankfully the value of the inventory was counted every year but what was not done was retire or sell both excess and outdated inventory. This therefore created a lightning rod for the seller and the buyer while they argued in detail about what was ‘good’ and ‘bad’ inventory. Working the balance sheet and making sure all the items are up to date and as accurate as possible helps to provide a true value of the business plus make it attractive to a potential buyer.
- Another reason to take this approach is that it could make the difference between the success or failure of the business. I was recently asked to provide a valuation for a business at two different dates. The first date was the month at the end of the death of the owner. The second date was 5 months after the death of the owner. The business owner was a healthy 50 years old and enjoying great success in his business. His death was totally unexpected. His death almost proved to be the end of his business because it was not being operated correctly and the financial statements of the business were ugly. Thankfully, just prior to his death he had started the process to get things up to date and so the new financial controller was putting ‘best practices’ in place and the business had the cash reserves to handle the immediate fall in sales that occurred due to the death of the owner.
A business is delicate and precise. Like a good garden, if it’s given regular and consistent attention by removing the weeds, trimming the overgrowth and providing regular watering it has a reasonable chance to grow and be successful. If the owner recognizes the importance of the financial statements and how to use them the results will appear in the value of the business. Use the value of the business to guide its course so when the time is right to sell the business you will receive the maximum price. This approach also brings a bonus as you may not plan to sell your business, but as the saying goes; if you receive an offer that’s too good to refuse you will get the best price for the business.
Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information please visit my webpage Business valuation.
If you would like more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.