The selling price of a business that goes onto the market is critical. If the business’s selling price is wrong the chances of selling go down considerably. The bad news is that only one in four businesses sell. Having the wrong price on the business for sale is one of the reasons 80% of businesses never sell.
When you think that you have determined the appropriate market price for your business, either by using a formal business valuation or by working with an experienced business intermediary, step back and ask: “Would this number make sense in the real world?”
Give the number one last check by using one or more of the following sanity checks.
Business valuation sanity checks
Industry rules of thumb. A rule of thumb based on percentage of revenue or a multiple of earnings can help support the reasonableness of a market asking price. Rules of thumb are sometimes published in trade journals, they can be passed along by word of mouth or obtained from business broker data.
Rules of thumb are never acceptable as sole methods of valuation. These formulas typically are over-simplified and do not always take into account the unusual strengths or weaknesses of a subject company. Further, rules of thumb typically estimate the selling price for the entire business and may not include inventory, accounts receivable, or liabilities. Most rules of thumb are market-driven; that is, they are a result of actual sales.
Read More Here is more information about valuing a business.
Justification of Purchase (JOP) test. This rationality check assumes the subject company is sold at its marketed value and financed using conventional terms. If the company’s expected cash flow will cover its hypothetical debt obligations, provide the owner a reasonable salary, cover any expected capital equipment expenditures, and provide a reasonable return on capital invested as a down payment, the test justifies the asking price. When using the JOP test, you will need to make various assumptions about a company’s probable financing terms, including the interest rate, debt-to-value ratio, or duration. Commercial lenders may help support financing assumptions.
Sanity checks can be useful tools to support your market value conclusions. But they are merely tools and cannot substitute for a full and well-reasoned valuation report.
Unlocking the Value: A Quick Guide to Determining the Sale Price of Your California Business
Are you a California business owner eyeing retirement and contemplating the sale of your business? The prospect is both thrilling and nerve-wracking. As a seasoned business broker in California, specializing in securing the best marketable prices for businesses, let me provide you with a concise guide on how to determine the sale price of your venture.
- Return on Investment Method:
Start by treating your business as a black box with a valuable output—the return on investment (ROI). Factor in your annual net profit, considering expenses like taxes, rent, and salaries. Subtract the cost of hiring someone to replace you. This method gives potential buyers a clear picture of the returns they can expect.
- Comparable Sales Method:
While ROI is crucial, sometimes what truly matters is what someone is willing to pay for your business. Look at recent sales of similar businesses in your area, known as comparables. While every business is unique, this approach offers a real-world gauge of your business’s market value.
- Industry Formula Approach:
Financial information services provide industry-specific pricing methods, often based on rules of thumb. For instance, a profitable manufacturer might be valued at two to three times its annual profits. This method, though helpful, has its limitations, especially when assets and profitability differ widely among businesses. See how multiple of earnings valuation makes it happen.
- Asset Value Approach:
Consider the total value of your business assets. This method distinguishes between businesses with varying asset bases. However, it might not fully account for the location-specific value of assets or the intangible value of goodwill, crucial in businesses with loyal customer bases.
In California’s diverse business landscape, these approaches collectively form a robust toolkit. As you plan your retirement and the sale of your business, remember, that determining the sale price is an art, not a science. Consult with a seasoned business broker like Andrew Rogerson to navigate this journey, ensuring you unlock the optimal value for your California business.
Your retirement awaits; let’s make it financially rewarding.
Final Take
Understanding EBITDA multiples in your industry isn’t just a nice-to-have; it’s a must-have in your business sale toolkit. Whether you’re in healthcare, commercial property, technology, manufacturing, or any other sector with businesses boasting annual revenue of $500k and above in California, these multiples play a pivotal role in driving the success of your sale.
By diving into the nuances of your industry’s EBITDA multiples, partnering with experienced professionals, and strategically leveraging this knowledge, you can position your business for a lucrative sale, setting the stage for a fulfilling retirement.
If you’re ready to embark on this exciting journey, armed with the wisdom of EBITDA multiples, I’m here to guide you every step of the way. Your business sale adventure begins now!
There are many different ways to value a company. The key is to use the right method for your specific situation.
If you’re a business owner looking to sell your company, you should use more than one of the valuation methods to determine your company’s worth before putting it up for sale.
If you need help with determining your company’s worth, schedule a free consultation with Andrew Rogerson. He can help you determine the best way to value your company and maximize its value.
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- Small Business Valuation Multiples
Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!
Closing Note
Using the best valuation formula to determine your biggest asset’s worth, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved.
When you collaborate with a business brokerage firm in California, it will provide all the solutions and insights toward getting the most out of the business sale.
There are only a few ways to sell and value a business quickly in California, and an experienced business broker like Andrew Rogerson can guide you through the best strategy.
It is currently the perfect storm to value and sell your business in California. With the great resignation that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.
With a certified business intermediary at your side, we feel confident that you will sell your business in California quickly and at the highest price.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com services the whole state of California.
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