Valuing Your Company
Estimating the fair market value of a business is part art and part science. For the purposes of this article, we are discussing small businesses. Small businesses are generally considered to be businesses that are independently owned and operated, organized for profit and are not dominant in their field.
The Art of Business Valuation
The art of valuation involves determining how attractive a business will be to the fair market of buyers of businesses. The ability to accurately gauge this comes after years of experience of evaluating and selling businesses. Some of the factors that can contribute or detract from the value of a business are: (1) is the industry improving or declining economically, (2) how many hours per week does the seller work and what are his or her duties, (3) how difficult will it be to find a buyer with the skills or qualifications needed to assume the seller’s role in the business, (4) does the business have solid, responsible employees, (5) how many staff or working family members could the business lose once a sale is completed, (6) is the business dependent upon one or two key employees, (7) is the customer base diversified or constricted, (8) is there a known threat of new competition, (9) are there any significant anticipated changes in the business or industry that would have a positive or negative impact on the business?
The Science of Business Valuation
The science of business valuation is primarily based on an analysis of the business’s financial statements. To a very large extent, the purpose of this analysis is to determine the financial feasibility of an asking price. In essence, “How much does it take for the business to pay for itself?” Some of the factors that can greatly alter the outcome of this analysis are factors such as: (1) are the financial trends of the particular business increasing or decreasing, (2) does the business have a solid financial track record for three to five years, (3) what debt will be eliminated or added when the business is sold, (4) are there any significant anticipated capital costs that are going to be required to maintain the business, (5) are the occupancy expenses of the business going to change dramatically in the future, (6) does the business provide sufficient discretionary earnings to support a typical buyer of the business, (7) does the business meet the criteria needed to obtain financing for a sale, (8) are accounts receivable within current industry norms?
The Influence Lenders Have on Business Valuation
About 70 percent of the businesses we sell are financed in one form or another. Therefore, when we work to determine how much money a buyer is likely to pay for the business, we need to take into consideration how much money a lender is likely to lend for a particular business. A business that meets the requirements for a loan will attract more buyers than a business that does not. We will cover financing options for business acquisitions in depth in a future article.
A Common Conundrum
A typical issue we see with many small business owners is that they are operating their business as if they are never going to sell it. The truth is that every business is ultimately going to either be sold or it is going to close its doors. We receive calls every week from people who unexpectedly need to sell their business for one reason or another. In some cases, it is for health reasons or other circumstances beyond the owner’s control. In some cases, it’s because the business is not performing as the owner expected and they need to get out before the business destroys them financially or emotionally.
For most people, their business is one of the largest assets they own; yet, they consider it a job rather than an asset that can provide for their retirement, sabbatical, desired career change, etc. We often start working with clients many years before they are ready to sell their business so they are in a position to capitalize on a sale when the time is right for them. I have worked with clients where our strategic planning has increased the value of their business by hundreds of thousands of dollars in a short period of time. With proper planning, a business owner cannot only increase the value of the business, but can also turn an illiquid asset into a very liquid asset. QCBN
Matt Uhler is the Principal and Designated Broker of WCI Brokers
Matt Uhler is one of seven professional business brokers with WCI Brokers. For more information and a complimentary, confidential interview call WCI Brokers at 928-445-1144. Learn more about us on our website at www.wcibusinessbrokers.com
WCI Brokers is the largest, full service, business brokerage firm in Northern Arizona. As business Brokers, we have facilitated over 500 business acquisitions in Northern Arizona over the past 15 years. This article is one of a series of articles written by our professionals at WCI Brokers on topics important to business owners.