Ready to sell your business in California for its Asking Price?
Every business owner wants to get the maximum value when selling a business in California. Additionally, the steps to sell a business are numerous and complex, but when a business owner decides they want to sell, the starting point is typically a business valuation.
Part of the purpose of the valuation is to normalize the business’s performance over the last three or four years, allowing potential buyers to identify trends and determine if this is a business of interest to them. My process also involves approaching third-party lenders, who typically approve SBA loans, to gauge their interest in potentially lending to this business through an SBA loan.
To compile the valuation, the necessary documents include the tax returns for the last 3 or 4 years, a current profit and loss statement, and a current Balance Sheet. See the documents needed when selling your business.
Tax returns and an accurate business valuation.
I recently asked a CPA and a Certified Appraiser why tax returns were the primary documents used to determine the value of a business. The two reasons I was given are that tax returns are documents that the business owner submits to the IRS, a Federal government agency.
As a result, by law, a third-party lender can request a copy of the document from the IRS, provided they have the business owner’s permission. This, therefore, provides the lender with some protection, ensuring that the document used to assess the business’s performance is accurate and correct. The second reason for using the tax returns is that the business owner signs them. Right above where it is signed, there is a clause that includes an acknowledgment, which begins with “Under penalties of perjury…” It is therefore expected that the signer or business owner is aware of the accuracy of the tax return, as they have no legal defense that they didn’t realize the tax return was not accurate.
The fact that tax returns are the basis of a business valuation is significant to the Seller. The purpose of the tax return is to report the annual sales and expenses to the IRS and pay as little tax as possible. When a business owner wants to sell their business, their goal is to achieve the highest valuation possible, thereby securing the highest price for the sale.
With this in mind, a qualified business appraiser, as part of their valuation process, will normalize the business’s performance by recasting the financial statements to ensure a more accurate representation of the business’s performance.
Financial Recast
Recasting simply means obtaining the SDE (Sellers’ Discretionary Earnings) of the business by adjusting certain items to reflect the actual financial performance. These items include:
- Owner salaries, including payments to family members.
- Any nonrecurring expenses.
- Interest payments.
- Depreciation expenses.
- Rent expense.
- Owner discretionary expenses, including owner bonuses and pensions.
- Any known increases in fixed expenses?
The recasting process yields a significantly improved representation of the business, which can benefit the Buyer if they opt for third-party financing.
It is also proper to recast the balance sheet. The balance sheet shown on a tax return is generally not an accurate representation of the company’s financial position. For example, a balance sheet on a tax return shows the depreciation value of fixtures, furniture, and equipment, as well as buildings, if the Seller owns the building. Another figure that is generally way wrong is inventory, as few owners have the time or inclination to get it accurate.
If you are considering selling your business within the next few years, start compiling an Excel spreadsheet with any one-time expenses you may incur, as these are legitimate add-backs that need to be taken into account when valuing or selling your business.
Privately held businesses have a unique position in the business world. The only time a business owner has any interest in knowing the actual value of their business is when they plan to sell. Otherwise, nobody needs to know, and there are too many other things to do with your time when you own a business.
Understand EBITDA Multiples by Industry
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 delving into the nuances of your industry’s EBITDA multiples, collaborating with experienced professionals, and strategically applying this knowledge, you can position your business for a lucrative sale, laying the groundwork 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 various methods for valuing a company. The key is to use the proper method for your specific situation.
If you’re a business owner looking to sell your company, consider using multiple valuation methods to determine its worth before putting it up for sale.
How do I find the value of my business?
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.
- How To Increase Company Valuation? 4 Value Drivers You Need To Know
- What is Quality of Earnings Analysis: Sell a Business Due Diligence in California
- Adjusted Financial Statements When Selling a Business in California
- SDE Adjustments To Make Before Selling a Business in California
- How Do I Calculate The Value Of My Business To Sell In California
- What is My Business Worth? | Valuing and Selling Your Business
- How Much is a Business Worth to Sell? | Determine Business Worth
- Income Approach Valuation | Finding Business WorthEasilyy
- How To Value A Business Quickly: Best Business Valuation Formula
- Seller’s Discretionary Earnings (SDE) Valuation | Selling a Business in California
- Valuation Formula: 10 Most Used Valuation Calculations | Quik Biz Valuation
- Secrets of Successful Negotiations: The Profit Multiple Valuation Advantage
- Financial Due Diligence When Selling a Business
- Income Approach Business Valuation Formula
- Small Business Valuation Multiples
Do you have any questions about valuing a company? Leave a comment below, and we’ll be happy to help!
Final Note
Using the best valuation formula to determine the worth of your biggest asset, 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 necessary to get 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 began during the pandemic, there is no shortage of experienced and well-financed buyers looking for the next opportunity to seize.
With a certified business intermediary by your side, we are confident that you will sell your business in California quickly and at the highest possible price.
Andrew Rogerson is a certified business broker based in Sacramento, California, who services the whole state of California.
Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com.
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