Even if you plan to own your business for the long term, valuation can and should be considered in the here and now, so you can:
- Develop an understanding of how valuation can be done
- Develop an understanding of the value of your business
- Get a realistic sense of how close the value is to what you hope to sell it for when the time comes
Now is the best time to valuate — for every business
The most effective way to communicate the value of your business is to build a story, rich in detail, that captures everything you’ve invested along your journey. The sooner you start building the story, the richer it will be in detail and context.
Potential buyers need something they can build the case for their investment with, which mean sellers need to provide workable, understandable numbers to support their argument. Below are three common methods that provide numbers to use as negotiating points.
Three practical business valuation methods
Note that this is by no means an exhaustive list. We like these methods, for businesses of all sizes, for their relative simplicity and affordability.
Comparable sales refers to the sale of comparable businesses across the market, both on a local and national scale. A valuable resource in for viewing the asking price of comparable businesses is the website bizbuysell.
Discounted cash flow is a metric owners can use to formulate their asking price by taking profits projected over the next 3-5 years, and discounting to reflect present value IE how much is that projected future income worth in today’s market?
Extrapolated value compares private companies to publicly traded companies. The price of shares of similar business can be extrapolated and used as a benchmark. A 20 to 30% discount from the value of the analyzed public holdings is common.
The more time you have before selling, the more you can build the market value of your business. Ultimately, what investors are looking for is an operation that comes with assurances of reliable profits, low risk, and low demands.
Good profit margins are worth more to investors if they come without headaches and require little time and effort from them. The absolute ideal is a business that earns revenue based on subscription sales or licensing fees.
How satisfied are you with the valuation of your business?
Small changes can lead to big results, both in operating and in selling your business. What changes can be made within your business? What specific things are potential buyers going to demand? How can you execute these changes?
Free Vector Advisers can help businesses of any size navigate the process of growing and selling. Our legal and business advice is available, with flexible terms, to business owners for immediate or long term exit strategies.
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For information and strategies regarding buying, growing and selling businesses, check back here twice each month.