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Importance of a business valuation when selling your business

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Article Overview: A great starting point if you are seriously considering selling your business is getting a valuation. Depending on the business valuation, your next steps may be getting advice from your accountant on how much you keep and how much will go in taxes so you know you truly wish to sell. But this article is about the importance of a business valuation prior to trying to sell your business.

Importance of a business valuation when selling your business

When most business owners decide to sell and they wish to be the one to start the process, the first and obvious place to start is with a business valuation. A business valuation gives the owner a reference point as to whether the price they hope to get for the business will be reasonable and/or achievable.

Some business owners choose the selling price for the business based on what they want in order to sell. They may have a certain amount of debt they wish to retire, money they need for retirement plus an ache that makes them think there business is worth a certain amount of money. Not a good basis for trying to convince a buyer about the asking price for the business.

Other valuation techniques include the "rumor" method. The "rumor" method is the price an owner chooses to use based on what he heard his friend sell his business. Rather than a friend, it could have been a competitor two counties over or something they read in the local paper. Once again, not a good method to use to convince a buyer on the asking price for the business.

Business valuations can be simple and straightforward or technical and complicated. If the business is 100% owned by one person, has been in the same location with roughly the same number of employees for the last three years and the business has been operated the same way, then a valuation would be fairly easy to do if all financial records such as profit and loss, tax returns and balance sheets are up to date.

The above can be complicated if the business only has one or two customers. If your business has existed for 54 years but has been supplying nuts and bolts you manufacture to General Motors and they are your only customer, how willing do you think a new buyer would be to take over the business.

Consider another example. If the business is 40% owned by a father that retired 6 months ago and now his son wishes to sell his 40% interest with the remaining 20% owned by a long term employee that is also going to retire in 12 months, how easy do you think it would be to value this business?

The bottom line is that the permutations are endless. But as we suggested at the start of this article, getting a business valuation is the right starting point. Inevitably the market will determine the final price paid. But don't forget, the price is only the start of the journey; it's the final terms of the offer that determine the value offered for the business. Price and value are not synonymous. The business may have a price of $1,000,000 but the value could be a totally different figure. You've heard the expression - Beauty is in the eye of the beholder. Value is from the same family, that is, value is in the eye of the Beholder.

Be aware there are different types of business valuations designed to meet different purposes. A business valuation that may go before a court of law is much more sophisticated and analytical than a business valuation that gives an opinion of value to the owner of a business that's thinking of selling. That is, the requirement to go before a court is that the valuation needs to be USPAP compliant. Know what you want from your business valuation and understand the final cost will vary according to the sophistication of the report.

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Article Tags: business broker sacramento, business valuation, sacramento business broker, selling your business



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Valuating A Business - Terry did you get the valuation down on the business?
Re: 3 Business Lessons I Learned (and almost missed) - Hello Evan, I watched the video and it was great to listen to your story on how you become a successful entrepreneur! With me, I never wanted to be in business because the thing I most dislike about it is selling. Let's just say that I'm the quiet kind and trying to convince a person to buy isn't really something i enjoy. But now that I'm older, i am more open to it, but I really need to believe in the product or service before I can bravely try to do "selling". I'm also very scared with numbers. The accounting part of managing a business scares me a lot, I am sort of dyslexic but only with numbers. Still, it is great to hear about other people's success. Maybe, if we had something like the Junior Achievement business high school program here, it would have helped me to see the possibility of starting a business. Thanks for sharing your story. I think the lessons you learned makes a lot of sense and I'll try to remember them in case I ever find myself in a business:D
Re: Ideas For Business - Hi, I'm Lucy's partner for this project and I think I came up with an idea of how to attract people. Sure selling is one thing, but heres something that definitely attracts people and thats charity! Everywhere you look today, even in the subway their selling pizzas that cost much higher then what you could buy at the store, but mostly people buy them because they know their money would go to charity and that makes them feel good and makes them think that they have just made a difference. I still have not figured out the percentage but if we donate like 25% of the money earned to charity for example, more people would buy. Charity is used in business to help people out but as well as attract more customers to their business. I know this might sound like a stupid idea but hey you can never know for sure until you try your ideas. Thats what business is all about.
Selling a Business - There are so many factors that need to be considered in selling a business, it can be daunting. Is there anyway your business can be re-located without losing value? In other words, how restricted are you in the location you're in now?
Re: New Year Resolutions... - [quote="Alan Mater":2acona1t]My New Years Resolution is to be earning $500+ with my online business. This includes any freelance work that I do. I'm about half-way there now. Another Resolution is to look into selling more on eBay and maybe finding a reputable dropshipper that offers competitive pricing on high-demand items. I like eBay and the opportunity that it provides. I've mainly been selling personal items, but I'd like to start tapping into a larger market and making some significant income on eBay.[/quote:2acona1t] Hi Alan, Do you mean $500+ per month? And when you're selling items on eBay from a reputable dropshipper... do you think it's still important to pick a product you're passionate about (like what an entrepreneur would normally do when starting a business)? Or is it just about moving a popular item for profit on eBay?


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