In part one of this two-part blog series, we looked at some of the formats typically used by business owners as they look to properly value their business ahead of a sale. This is a vital part of the process in any such sale, and knowing how to navigate it will often make a big difference toward your eventual success.
At Utah Business Consultants, we're here to offer a wide range of business broker services, including comprehensive business valuation solutions that are enormously beneficial to many of our clients. In today's part two of our series, we'll look at some basic tips we offer as you move forward with your valuation, regardless of which type you're using.
Financial Statements and Seller's Discretionary Earnings Statement
One of the first important things to understand is that the business valuation process will almost always require a close look at your financial statements. This is vital information in understanding what a business is worth, and it's important to be as accurate as possible when putting this together. If you're not comfortable doing this yourself, seek out help from an accountant or other financial professional.
In addition, you'll also need to prepare a seller's discretionary earnings statement. This will look at the business's net income, adding back in expenses that are considered discretionary for the owner. This might include travel expenses, for example, or certain entertainment costs. This can give you a clearer picture of how much profit the business is truly generating.
Next up, you have to determine the asset value of the business. This will look at both physical assets, such as equipment or inventory, and intangible assets, such as intellectual property. Once again, it's important to be as accurate as possible in valuing these things, as they can play a big role in the eventual sale price.
Using Price Multiples
As you move forward with your valuation, you'll also want to consider using price multiples. This is a method of valuing a business based on certain metrics, such as earnings before interest and taxes (EBIT), sales, or earnings before interest, taxes, depreciation, and amortization (EBITDA). This can be a helpful way of coming up with a number, particularly if you're not entirely comfortable with the other methods.
Using Comparable Businesses
Another option is to look at comparable businesses that have recently been sold. This can give you a good idea of what similar businesses in your industry are fetching on the open market. Just be sure that you're comparing apples to apples, as businesses can vary greatly in terms of size, profitability, and other factors.
For more on some of the important elements you need to be considering as you assess your business valuation ahead of a sale, or to learn about any of our business broker services, speak to the team at Utah Business Consultants today.