When deciding whether to sell your business you probably have one question: How much will I get? There are different ways to find the answer.
The value of your business is constantly changing. Some industries have standard valuing practices, such as selling for three times estimated book value or a multiple of cash flow, but transaction specialists use several standard ways to value your business.
1. Income Approach
This is a standard valuation. The buyer of a business looks at the transaction as an investment, so they focus on cash generating and growth metrics.Pro Tip: Ask your analyst to focus on the Discounted Cash Flow Analysis approach. This approach factors in the future value of the cash-generating potential of your business and not the standard five- to 10-year outlook.
2. Market Approach
Under this approach analysts will compare your business to other businesses. They make comparisons to public companies or, similar to residential real estate, they will look at recent transactions in your area.Pro Tip: Obtaining a valuation on a routine basis will help you take immediate advantage of market opportunities.
3. Asset Approach
Use this approach as a last measure. Analysts will use this method to determine the value of your company’s assets. No potential value-adds or growth will be reflected in the sales price using this method.Pro Tip: Know your definition of financial independence. When the sale of your business meets your definition of financial independence, don’t hesitate to sell!
Knowing how transaction specialists calculate the value of your business allows you to focus on the key metrics that will ultimately impact the sales price of your business.