Now, let’s talk about the valuation of the business. If you can benchmark your business against others in your industry, that will give you a bit of a guide of how to value your business. There are quite a few tools around. I have a couple of online tools that I like to use that can give you some sort of an indication.

You can usually find out what businesses sell for in a certain industry from a business broker association. If you talk to a business broker, they will be able to give you a guide. There are general rules of thumb for different industries.

But we want to go beyond that. We don’t want industry averages at all, in fact. To me, that would be always be the low-ball. That’s when you just say, “Thank you very much” or “That’s interesting. How did you arrive at that figure?”

It all comes back to thinking about who’s going to buy your business, so you can pitch it in an attractive way. To do that, you have to understand where the market is heading, who the competitors are and how you can project the future cash flows. Because that’s what people are buying. That’s what the purchaser is going to buy. They are buying the future cash flow they will be able to extract from your business to put into their own business.

I mean, take me away from discounted cash flow calculations. It’s not me. Your accountant will be able to help you out on that one. When you do your future financial projections, look at the revenue that you’re going to generate and bring that back to “today’s value” based on an interest rate. That will give you some idea of what they think your business could be worth.

Couple that with what you need from a financial planning perspective and see if there’s a gap. If there is a gap, then we need to examine it more closely to find out what we can do to close the gap so that it doesn’t exist.

The moment that someone gets a sniff that you want to sell your business they are going to say, “What do you want for it?” How do you answer that question?

The most important question you can ask in response is “Why are you interested?” because one of the really important things to do is to understand the buyer. It’s getting into their head and understanding what’s motivating the buyer. Why do they want the business?

No matter what type of sale you are making, even if it’s a family business and there’s a succession happening, you need to understand the successor. What kind of planning is going on in their minds?

Some of the questions you should consider asking them are “Why are you interested?”, “What are you going to do with the business?” and “How do you plan to grow it?”

If they answer all those questions and they’re still saying, “What’s your asking price?”, you can respond with “What do you think it might be worth?”

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How do I Value My Business?

How do I value my business?” is a question every business owner asks at some time, and it’s complicated because calculating business worth is not quite as simple as just looking at the balance sheet.

The first step in understanding how to value your business is to indeed “run the numbers”, but as a business owner you need to consider far more data points than your accountant does.

To an accountant, the net present value of your business is the only thing that matters. For you, however, and anyone seeking to buy your business, it is the future potential of the business that should be more important.

Make Sure to Value Your Business Correctly

If, as a business owner, I value my business too low, it can have a detrimental impact on my exit strategy. In fact, if I were to calculate the value of my business based on accounting information alone, it could easily wipe of up to 40% of the true value.

There is a lot of information accountants don’t look at when making an assessment. Their main task is to give you the best tax position and make things look cheerful for any public shareholders that may have a stake in the company. They don’t have a strong interest in determining the real value, and in fact with the data they have, they simply can’t.

Some Questions to Ask For Calculating Business Worth

Some of the things that have an impact on the business that accountants don’t normally investigate include:

  • Is the business currently facing litigation?
    • Is the business expected to lose this litigation?
      • Yes? There will be a negative impact on value.
      • No? There will be a neutral impact on value.
  • Is the business currently enacting litigation against a third party?
    • Is the business expected to win this litigation?
      • Yes? There will be a positive impact on value.
      • No? There could be a negative impact on value.
  • Is the business presently expanding?
    • Yes? There could be a positive impact on value.
  • Are there third party construction plans in the area near your business?
    • Yes? Are they things likely to increase trade when completed?
      • Yes? There could be a positive impact on value.
      • No? There could be a negative impact on value.
  • Are you in the process of acquiring or implementing new technology?
    • Yes? There could be a positive or negative impact on value depending on whether the technology works. Some good technology can still have a negative impact if people fear or distrust it.

These are just some of the many things I need to consider when I want to know what is the value of my business. If you’re presently wondering, “How do I value my business?” the easiest way is to get advice from experts in valuing a business.

Book a free consultation with The Exit Strategy Group today and get the kind of advice you’d happily pay for, absolutely free. When you know what your business is truly worth, it gives you the confidence that comes from making informed decisions.

The Exit Strategy Group can assist in working out how to calculate what your business is worth, how to value your business, business succession planning, how to sell a small business and transition planning.

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