Service business valuation: When it’s time to sell your business services company in California, the very first step is to value your business. This is true regardless of the business you are preparing to sell. It makes sense, of course; you can’t sell something until you know what it is worth.
But why, exactly, is it so important to get it right, and how do you go about valuing your business? Here are some key factors to consider when determining the value of your business services company, along with the importance of each step.
The Owner Dilemma
Like any baby boomer business owner, the owner of a business services company will typically do one of two things when evaluating the value of their business.
- Underestimate Business Value: Many business owners don’t know what goes with their business when they sell, fail to understand some of the intrinsic value of their company, and sometimes are even just hesitant to assign a value to their business at all. This means they come up with a low number.
- Overestimating Business Value: Often, when owners estimate the value of their business, they tend to overestimate it due to the years and effort they have invested in it. Of course, every business owner wants to be paid for their time and expertise, but that doesn’t reflect what the business is truly worth to someone else.
This is why it is essential to go through the business valuation process. There are several ways we accomplish this at Rogerson Business Services.
The Business Valuation
If you just want to get a general idea of what your business is worth as you develop your exit plan, we offer a free tool that guides you through the business valuation process in seven steps, using a free spreadsheet. While not a certified business valuation, it can be used in conjunction with a buyer or lender to help you prepare for the more formal process and provide an estimate of your company’s actual worth.
But when you are ready to sell, you will need an official business valuation. You’ll want to have this done by a Certified Business Broker. What do you need to complete that process?
- Three years of tax returns, both personal and business.
- Profit and loss statements from the three previous years.
- The Value of Business Assets and Equipment
- Other related financial documents.
You’ll need to gather these documents and ensure they are accurate and up to date to determine the value of your business accurately.
Once your business broker has these items and any other requested information, they will be able to perform a formal business valuation. This valuation can be used to set the price for your business and may also be provided to a lender if your potential buyer requires financing.
Cleaning House and Your Business Valuation
Your business broker can also assist you with recasting your financial statements. You’ll add things like owner salary and benefits, and certain other items you may have deducted back into the value of your business. Since you often arrange your accounting to show the least tax liability, you need to show your buyer instead the true earning potential of your business.
The key at this point is to be transparent. Any potential legal actions, financial liabilities, or debt will become evident during the due diligence process. If you have left anything out of the information you’ve given to your business broker, this can even be a deal killer.
See: How To Value A Business Quickly?
Why is it Important to get the Business Valuation Right?
Your business valuation serves as the foundation for every other aspect of selling your business. It helps you and any potential buyer determine the actual value of your business. But it goes further than that.
Remember, we mentioned that one of the purposes of a certified business valuation is to provide documentation that, if needed, your buyer can present to a lender. The lender will thoroughly examine this valuation, as it is crucial to securing any business loan.
Errors in your business valuation can hinder your buyer’s ability to secure the necessary financing to close the deal. This can result in you being unable to sell your business for the right price to the right buyer at the right time.
A business valuation is only as reasonable as the data that goes into it, so be sure to be open and share all relevant information with your business broker. Ensure that all information is correct and up to date to avoid issues later on.
If you’re looking to sell and value a business services company in California, you’ll need to start with a service business valuation. Contact us today at Rogerson Business Services. We can help you get the process started. We’d love to be your California Certified Business Broker and assist in selling your business to the right buyer for the right price at the right time.