Many small business owners are not sure how to go about selling their business and end up selling for less than they could have. If you're looking to sell your small business, there are many things to consider before taking the leap. You should know what your company is worth today so that you can get the most money back when selling it. There are a few ways of valuing a small-to-medium-sized company like yours; we'll discuss each one in detail below, as well as their pros and cons!
6 ways to value your business
Comparable Company Analysis - This method involves selling your company based on using comparables of similar companies that have sold in the past. You can use this information to determine both what other businesses like yours are selling for, as well as how much you would sell for if you were selling some of your business's assets instead of all or most of them.
Asset Purchase Analysis - This method is selling your company based on what it would cost to only purchase the assets of your business, not its liabilities or operating agreement. You can use this information to determine how much you should sell for if you are selling off all, some, or none of the assets in your small business.
Market Approach - This method involves selling your company based on the assets, liabilities and operating agreement you have. You can use this valuation to determine how much buyers would be willing to pay for all of the components of your business (assets + liabilities) by looking at what other businesses similar to yours are selling for.
Liquidation Value - This is the amount of money that would be received from selling all assets of a company, liabilities included.
Discounted Cash Flow Method (DCF) - The DCF valuation takes into account your estimated future cash flows and discounts them back to the present day. These cash flows are then used to find the business's intrinsic value.
Income Capitalization Method - This valuation is used to find the value of a company's future income streams. The streams are then capitalized (multiplied by a number that reflects how risky they are) and summed up to find the business's total value.
Pros & Cons
It's clear there are many different ways to value your small business, but not all of them are perfect. The most common valuation methods for selling a small business, like the Comparable Company Analysis, Discounted Cashflow, and Income Capitalization Methods, have their pros and cons which you should take into consideration before selling your company's assets:
Comparable Company Analysis
Pros - This method is simple to perform, meaning that it can be completed in a short amount of time.
Cons - This method can be subjective, as it relies on what comparable companies have sold for in the past. This information may not be accurate, or may not reflect your company's unique selling points.
Asset Purchase Analysis
Pros - This is an objective way to value your small business that is also simple to perform.
Cons - The value of your company's assets may not accurately represent what buyers are willing to pay for it, since selling off all or some of the assets could change its worth significantly.
Market Approach
Pros - This method can be accurate when done right and takes into account all selling points of your company.
Cons - This method can be time-consuming and expensive to perform, as it often requires the help of an outside expert.
Liquidation Value
Pros - This is a fast and easy way to value your small business.
Cons - The liquidation value may not accurately represent how much your company is worth, since selling off all or some of its assets could change the value drastically.
Discounted Cash Flow Method (DCF)
Pros - This method can be accurate and quick if performed correctly by an expert. It also takes into account a company's future cash flows in determining its value.
Cons - If done wrong, this method can be time-consuming and expensive to perform. It is also subjective, depending on what assumptions the expert making the valuation makes about future cash flows.
Income Capitalization Method
Pros - This method is also fast and easy to do if performed correctly by an outside expert.
Cons - This method can be inaccurate due to its subjective valuation of future cash flows, and the potential for an expert making this kind of valuation to make mistakes when estimating these values.
When selling a small business, it's important to make sure that you are getting the best possible price for your company. By using one of the methods listed above, you can be sure that you are selling your business for its true worth!
So how do you find a good business valuator? There are many ways to find professionals who know what they're doing, like referrals from other business owners or trusted financial advisors. You can also reach out to us at Impact Management Group where we have over 60 combined years of consulting experience where we've helped small businesses like yours successfully value and sell their companies.
Recap
Remember, selling a small business can be an emotional process. Make sure to have a clear idea of what you want from the sale and who your target buyer is before starting.
Don't forget that there are many different ways to value your small business - choose the one that best fits your company's unique selling points.
Finally, make sure to get expert help if you're not familiar with the valuation process. An expert's help can ensure that you get the most money for your small business.
Selling a small business can be an exciting - and sometimes daunting - process. By knowing what to do and who to turn to, you can feel confident selling your company for its true worth!
Good luck, let us know if you'd like our help or just let us know how it goes!
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