How To Value Your Business For Sale

Why Business Valuation is Important

When you're selling your business, the value you set will determine whether or not you’ll attract serious buyers. If the price is too high, you may scare off potential buyers; if it’s too low, you may leave money on the table. An accurate business valuation helps you:

• Set a realistic asking price based on your business’s worth
• Attract serious buyers who are prepared to make an offer
• Avoid undervaluing your business and losing potential profits
• Understand your business's market position compared to similar businesses for sale

Having a professional business broker assist with valuation can also help you identify any areas of improvement in your business that could increase its value before listing it for sale.

Step 1: Assess Your Business’s Financials

The first step in valuing your business is to take a close look at its financials. This includes:

• Profit and loss statements
• Balance sheets
• Tax returns
• Cash flow statements

Financials are at the core of most business valuations, as they provide an in-depth look into the company’s profitability, assets, and liabilities. When buying a business, a potential buyer will typically request financial records to evaluate the business’s past performance and future potential.

It’s important to ensure that all financial documents are up-to-date and accurately reflect the business's performance. If necessary, consider working with a professional accountant or business broker, to clean up your finances before proceeding.

Step 2: Use the Right Valuation Method

There are several approaches to valuing a business, and the method you use will depend on the nature of your business and the type of buyer you’re targeting. Here are some of the most common methods used to value businesses for sale:

1. Asset-Based Valuation

This method focuses on the tangible and intangible assets of the business, such as property, inventory, equipment, and intellectual property. It’s ideal for businesses that have a significant amount of physical assets. The formula for this method is:

Business Value = Total Assets - Total Liabilities

This method is often used for businesses that are asset-heavy, such as manufacturers or auto body parts companies.

2. Market-Based Valuation

A market-based valuation compares your business to similar businesses that have recently sold in your market. This method considers industry trends, economic conditions, and comparable businesses for sale. By looking at sales prices of similar businesses, you can determine a competitive price for your own business.

This approach is commonly used for service-oriented businesses and those with a large customer base.

3. Income-Based Valuation

The income-based valuation method looks at your business’s ability to generate future profits. It’s based on the concept of “future earnings,” considering factors such as projected revenue, cash flow, and growth potential.

There are two common types of income-based valuation:

• Capitalization of Earnings Method: Typically used for businesses with steady, predictable earnings.
• Discounted Cash Flow (DCF) Method: Used for businesses with variable cash flow, where future earnings are adjusted for risk.

This method is particularly useful for businesses like franchises or those with established cash flow streams.

Step 3: Factor in Market Conditions

• The market conditions and the broader economy will play a significant role in the value of your business. For instance, if the economy is booming, buyers may be willing to pay a premium for businesses in high-demand sectors. Conversely, during economic downturns, buyers may be more cautious, which could impact the selling price.

• A business broker can help you assess current market conditions, including the demand for your type of business. They have access to real-time data and can offer insights into industry trends, buyer behavior, and competitor pricing. Understanding the market will help you adjust your price accordingly to ensure your business is both attractive to buyers and valued appropriately.

Step 4: Understand Your Business’s Intangible Assets



• While tangible assets like inventory and equipment are easy to value, intangible assets like brand reputation, customer loyalty, intellectual property, and business goodwill are harder to assess but just as important.

• Buyers are often willing to pay a premium for businesses with strong customer relationships or proprietary technology. For example, if your auto parts business has exclusive supplier contracts or a loyal customer base, these intangible factors can significantly increase your business's value.

• When selling your business, it’s essential to highlight these intangible assets during the sales process to demonstrate the full value of your business to potential buyers.

Step 5: Work With a Business Broker

• Valuing your business for sale can be challenging, especially if you’re not familiar with the intricacies of business valuations. This is where a business broker becomes invaluable. A business broker will provide:

• Objective expertise: Brokers can offer a neutral, professional perspective on your business’s value.

• Industry knowledge: A business broker will understand the local market and industry trends that affect your business’s value.

• Valuation tools: Brokers have access to proprietary tools and resources to ensure that your business is valued accurately.

• Confidentiality: A broker can ensure that sensitive financial information remains confidential while still marketing your business to prospective buyers.

Step 6: Prepare for Negotiation

• Once your business is valued, it’s time to set an asking price and prepare for negotiation. Buyers may try to negotiate a lower price, so it’s important to be prepared with a well-supported valuation. Your business broker will assist with negotiations, using the valuation data as a foundation to defend your asking price and ensure you receive a fair offer.

Final Thoughts

• Properly valuing your business is a critical step in the process of selling it, and it’s one that shouldn’t be rushed. By considering factors such as financial performance, market conditions, intangible assets, and the right valuation method, you can set an appropriate asking price that attracts serious buyers while maximizing your return.

• If you’re considering selling a business, brokers can help you with every step of the valuation process. They have the knowledge and experience to accurately assess your business’s worth and ensure you achieve the best possible outcome in your sale.