There can be many reasons to sell your business. Whether it's to help fund your retirement, give you the space to focus on other priorities, or change businesses altogether, you need to know how much your business is worth to ensure that you get the money you deserve for the years of hard work you've put into growing your business.
How do you value a business? A lot goes into valuing a small business for sale. What assets does the business own? What is the cash flow like? What are those intangible aspects of your business which make it worth a whole lot more?
Read on, and we will help guide you in discovering how much your small business could be worth.
If you arrive at a meeting to discuss selling your business, and you don't have all your information ready to go, this can reflect poorly upon you and your business. You may put potential buyers off buying your business.
Things you will need to bring with you when discussing the sale:
Some legal information you will need to bring:
Bring in details about staff and supplier information:
And bring some details about your business:
We highly recommend getting professional advice when selling your business. Start by talking to your accountant or bookkeeper. They can help with your documentation, but they also likely know someone who can help value your business for sale.
An independent third party helping you out can also remove bias and sentimentality when valuing your business, as well as give an honest opinion and price point.
How much is your business worth? What is its value? How do you determine this? Deciding the value of your business is complicated and can be done in many different ways. Do you value your business based purely on physical assets? How about the real estate the business owns, such as outlets or warehouses in California? Or is it valued based on how much an owner gets back on their investment? Let's look a bit closer?
This is arguably the easiest way to value a business. You add up the value of any assets the business owns, and take away any liabilities.
If your business owns a million dollars of machinery and equipment, and has $200,000 in outstanding invoices, then the value of the business stands at $800,000.
The common way to value a business asset is to deduct the accumulated depreciation from the original purchase price.
An asset begins to depreciate as soon as it 'leaves the lot' as they say. Let’s say you bought a truck for your business, and it cost you $40,000 new off the lot 3 years ago. In the first year, let's say that it depreciates by around 25%, or $10,000 in value. A 25% depreciation over 3 years would leave this asset worth only $16,875.
If someone were to buy your business now, how much return on their investment would they get?
This can be calculated by the Return-On-Investment (ROI) that you will be getting from the sale. You do this by:
The disadvantage to this approach is that it doesn't consider the length of time an investment has been held. A 10% ROI over 12 months is better than a 10% ROI over 10 years, but it is still 10%.
This formula can be used once you know the ROI of your business, or the ROI you want from your business, from your initial investment.
The formula is - (Net annual profit/ROI) x 100 = Value (selling price)
If your business’s net profit for the last financial year was $200 000, and you wanted an ROI on the sale of your business of 50%.
Value of your business = (200,000/50) x 100 = $400,000.
The strength of this formula is you get a big say in the price that you want. You always want to have a positive ROI when you sell your business.
An entry cost valuation is where you calculate the cost to start a similar venture from scratch, rather than buying a business yourself. Things to consider in this method of valuation include:
For example, it may cost you $1 million to buy equipment and set it up. You’re looking at $100,000 a month for overheads such as recruitment and training all the staff and developing products and services, and it will only take 6 months to get a reliable customer base. You’re looking at $1.6 million worth of business.
Now you can look at how to save costs:
The price to earnings (P/E) ratio measures a company’s current share price relative to the earnings per share. A high P/E ratio could indicate a company’s stock is over-valued, or that investors are expecting high growth rates in the future.
To calculate your profit ratio, the formula is:
(Total revenue - Total Expenses) / Total Revenue
The result is shown as a percentage.
You can find the current actual profit ratio using historical data. And from this, and making judgement calls on the current market conditions, you can give an estimated profit ratio. This helps potential buyers decide if they want to buy or not.
A lot goes into valuing your business, and it is a big step in deciding to sell. Whether you're ready just starting out in business or are in the midst of a growth plan to sell your business down the line, one of the best ways to fast track the success of your business is by utilising outside, experienced help.
By working with the right business coach, advisor and mentors with been-there-done-that expereince, they can give you an unbiased, 3rd party view of your business, and help you scale to the level you want it to get to.
Let us get you started on this journey to growing and potentially selling the 7 and 8-figure business you've always dreamed of with our exclusive short course on Building A 7 & 8-Figure Business That Works Without You. Led by our Founder and 5x AFR Young Rich Lister, Jack Delosa, you'll be guided on the high level principles and strategies you need to know to stop running your business like a startup, and start running it like the top entrepreneurs around the world.