The Real Way Your Small Business Will Be Valued
As a business owner, one of the most challenging things you may do is sell your business. It’s not just that it’s an emotional challenge, but it’s a logical one as well. There is a lot that goes into selling a business, after all, including getting your finances in order, setting up your succession plan and/or leadership team and having a legal team in place.
While you may have ideas in mind when it comes to how you would like your business to be run after you leave, what direction the company should take and who you’d like to occupy certain key positions, the most important factor in determining whether or not you sell your business is the price you’ll get for it.
The price you’d like to get in a sale and what you can expect to get are often two very different numbers. Coming up with a clear and accurate valuation of your company is very important, as it will be an independent source of information for you during negotiations. It will realistically tell you how much you might be expected to get from selling your business and, therefore, what deals are good and what deals are not.
In most cases, you can come to a relatively accurate valuation of your company in three steps.
Step 1: Find Comparables
It may sound strange that the first step in valuing your own company is to look at other companies, but this is often the step that will take the most research on your part. You should know all your company’s pertinent financial information, so that step (which is next) won’t be nearly as difficult.
In this step, you’ll want to find similar companies to yours in your industry. Look for companies that are similar in size, scope and aim. Oftentimes, these will be your main competitors, but sometimes, they won’t be. They may be located in your region, or they may be located in another region of the country.
It would be great if you could identify some companies in this step that have either sold recently or had valuations done for other things, such as raising capital. This will give you a good comparison for when you’re conducting your company’s valuation.
Step 2: Analyze Your Company
The next step is to take a look at the metrics that will matter in your industry. For example, if your business is in retail or in consumer products, then the metric that may matter the most in terms of valuing your company is net revenue, not gross revenue as some people may think.
In this scenario, net revenue would often represent your total revenue in sales for the year, minus any discounts or returns. While it will be important to analyze your net revenue over time, the most important timeframe is the last 12 months.
Valuations for retail or consumer businesses will then most often be calculated by applying a multiple to that net revenue over the last 12 months. This multiple is most often between 1x and 5x. For example, if your net revenue for the last 12 months was $1.2 million, your valuation could range anywhere from $1.2 million on the very low end to $6 million on the upper end.
If you’re in another industry, such as tech, it becomes a little tougher to come up with a valuation because it won’t be based on such simple numbers as net revenue and actual sales. In these cases, net revenue is still a great measuring stick to use, although you may also need to factor in potential immense growing power, depending on your industry and comparable companies.
Step 3: Refine Your Comparisons
Now that you have a list of your comparable companies as well as your valuation based on your net revenue, it’s time to revise your list of comparables to come up with your final valuation.
In this regard, try to take a look at comparable companies that have either sold or at least raised capital within the last two to three years. This timeframe will be the most pertinent to your upcoming sale. If possible, you’ll want to also look at companies that are located in your region, as that will be more indicative of the future success of your company for the new owner.
If you’re selling your company outright, you want to try to get comparable companies that have done the same thing. If all you can find are companies that raised money in the last two to three years, then you’ll want to bump up your valuation by a multiple or two, as outright sales are always valued higher than raising capital.
Once you have all of these pieces to the puzzle in place, then you’ll be able to make an accurate valuation of your own company. What’s great about conducting a valuation analysis this way is that not only will it give you a fairly accurate estimate for your company’s value, but it will also provide you with data and facts that you can provide to potential buyers of your business to back up your asking price.
Our best advice? Don’t waste another day and talk to a Sunbelt South Florida broker today!
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.