Ways To Determine Value Of A Company

If you own a business, at some time or another you have probably wondered, “What is my company worth?” Many entrepreneurs make the mistake of not knowing what their business is worth. When an investor makes an offer, the business owner either jumps at it or turns it down prematurely and doesn’t know if he made the right decision.

One of the most common ways to value a company is EBIDTA, that is, earnings before interest, depreciation, tax, and amortization. This statistic is most valuable to investors when company’s assets are fixed and subject to a great deal of depreciation in value. It is also important when assets belonging to a company are largely not “real” items, such as when a company has recently purchased intellectual property in a merger or other acquisition. This measure of value is, in effect, the income that a company can use to service its acquisition debts. It is most useful as a tool for evaluating large companies that have substantial assets or companies with a significant amount of debt. There are more effective ways to evaluate smaller companies that do not have a large amount of assets or liabilities.

For smaller companies that do not have a significant amount of debt, particularly start-ups that people develop with their savings and in their spare time, a more straightforward measure will work. People looking for something to invest in want a business that makes money, plain and simple. Revenue minus operating expenses evaluated over the period of at least 12 months is the most common way for investors and buyers to value a business. Owners of startup businesses also typically include the price of significant equipment. For example, a company that provides website services might include the cost of servers. An additional factor would be whether you are providing intellectual property, such as lists of clients, and proprietary information like programs created by yourself or your employees. These items, though intangible, can markedly increase the value of your business if you can demonstrate their future value. Further, if you own patents in conjunction with your business, this can also improve your stead in the eyes of a purchaser. 

It is important to remember that value can vary a great deal according to how successful your particular marketing niche is. If your business is doing well and the particular business sector is expected to experience solid to above-average growth within the next few years, you can capitalize on a buyer’s high expectations. Each selling company and buying company is different and therefore it can be difficult to arrive at the fair market value. However, if someone sees your target market as a key business line for his or her company, you can receive a premium price for your business.

Get Your Ducks In A Row Before You Sell Your Business

There are a million reasons to keep or sell a business on any given day. If you find yourself asking, “Should I sell my company?” on more than one occasion, it might be time to consider a sale. Selling your business will have serious, life-changing implications. It is important to consider all of your options before you decide to sell, as well as the potential for unforeseen consequences. Once you have signed a sales contract, you don’t get to ‘unsell’ your business. You want to be sure that you are making the right decision when the time comes. Enlisting the help of professionals and asking yourself hard questions will help you feel confident in your decision.

There are several professionals that you will want to consult when you are considering a large dollar sum sale. First, talk with your financial advisor. He or she should help you with asking yourself the hard questions, such as whether you are indeed ready to sell, or if a break would rejuvenate your interest in the business. He or she might suggest bringing in outside management as an alternative to selling the business. Your business lawyer should be able to evaluate potential legal risks. A common clause in many business sales may preclude your from engaging in business within that sector for a specific period of time after the sale. A lawyer who specializes in business law should be able to draw up agreements for you that are standard in the industry and specialized to fit your situation at the same time. Finally, an accountant can help you understand what types of tax burdens you will face as you sell your business. In some cases, it may be advantageous to arrange a business exchange or sell at a different time than you had planned. As a rule, the best time to sell is when the business and your sales are peaking and the industry is likely to attract great interest, but from a tax standpoint, you may need to officially close the sale after the end of the current tax year.

Other issues to consider include the well-being of your employees and what obligations you may have to fulfill if the business sells. Current employees do not necessarily roll over to the new employer. If your business exit requires termination of salaried employees, severance pay and leave entitlements may require you to pay out more than you had intended. Some employers consider it good business practice to negotiate interviews for all existing employees when the business changes hands. While this is not common, it is a way to foster goodwill and important if you intend to open a new business within the same industry.

Preparing A Business For Sale

Once you have made the decision to sell a business, you have a number of things you’ll want to do to make your business more desirable for the new owner. You only have the opportunity to sell your business once, so you have that one chance to get it right. When you are planning the sale of your business, being well prepared can increase the end dollar value you receive.

In the ideal situation, your management style will have prepared your business for sale long before you sought to sell it. Even if this is not the case, you will want to ensure your business is represented well to show buyers clear reasons to choose your business over other investment opportunities. Organizing everything into a few binders will make it easier for your agent to communicate with the buyer’s agent and easy for the buyer himself of herself to see the advantages of owning your business. One of your binders should contain rules, policies, and procedures. This makes it easy for a buyer to step into the ownership role. While you may have prided yourself on running a successful business out of your head, buyers with less insider knowledge may fear that you are the reason your company is successful and be reluctant to buy for fear that they do not have the tools they need to be as successful as you were.

When providing your procedural binder, be sure to document those policies and procedures that are unwritten within your company. Coming into a strange culture with a large number of inexplicable rules can mystify any employee, and “that’s the way it’s done” is an unsatisfactory response. Having your company broken down by function is a great way to beef up your procedures manual and help potential buyers feel comfortable within their new leadership role. An explanation of each department, its function, and employee roles within the section is another way to bolster buyer confidence. Human resources can be one of the most frustrating parts of a job, so having a functioning blueprint of what to do and how to do it can be indispensable when taking leadership of a business.

If you have a large number of suppliers and customers, documenting agreements with these groups will be an excellent addition to your second binder. Focused on business relationships, this set of documents provides logistical support to prospective buyers while building confidence. Be sure to work with vendors and customers to maintain contracts in workable state for at least 90 days after the new owner comes in. Renegotiation can make or break a business, so you don’t want him or her afraid of a loss in sales or suppliers right off the bat.

Getting Your Business Ready To Sell

While there are many reasons to sell a business, there are numerous ways to ensure you are presenting your business in its best light for a successful sale. Positioning a business for sale within the marketplace can determine when selling is the best business strategy for you. Converting your hard work into cold hard cash is easiest if you observe a few rules.

Always sell on your own terms. If you feel that you are getting too old to run your business or anticipate having a lot of family or marital problems that are going to interfere with your ability to run your business the way you want to, it might be the best time to sell. Don’t wait until you’re recovering from a surgery or fighting a bitter custody battle to sell your business. The additional stress is not something you need to deal with and you won’t be able to put your best foot forward, adding to situational stress and increasing the likelihood that you will sell too low or miss the opportunity to sell at a pivotal moment.

Sell for the right reasons. Buyers want to hear that they are buying a successful business because the owner is pursuing opportunities in a new sector or retiring, not that he or she got sick of fighting with regulatory agencies or is convinced that the industry will be defunct within the next ten years.

Know what you’re selling and make sure potential buyers do, too. Be very specific about what is and is not included, line by line, in the contract occurring between you as the seller, and the buyer. Before selling your business, you need to be clear what assets come with it and what inherent value they provide. Beyond physical assets, intangibles such as good will, trademarks and customer lists can add substantially to the value of your business. Likewise, a business could be worthless without them.

Make use of your resources. Chances are, you have at least one lawyer, an accountant, and a financial advisor on your roster. If not, now is the time to employ them. You need to make sure that your financials are in order and that you will not be legally bound to perform for anything other than the information specified in the contract. In addition, a firm who specializes in business like yours can be an excellent way to ensure that the right people see your business when you are ready to sell. And, experienced intermediaries are willing to provide a ballpark figure of what value your business should command and how best to highlight its best features.

Illustrating Company Value

If I want to know how to show my company value, what do I do? What makes up value? Value is a term thrown around these days, from fast food menus to diamond commercials. More than commercial puffery, value is a real way to determine what your business is worth to investors and potential buyers alike.

There are numerous ways to measure value. Value of a business is a cumulative total of both hard assets and intangible assets such as human capital and intellectual property. It is easy to show a dollar value for assets such as equipment and real estate but extremely difficult to quantify an amount for things like efficiency and business knowledge.

When you are illustrating company value, the first thing to do is record the fair market value (FMV) of all your equipment. FMV is the amount of money you would get for each piece of equipment if it were sold on the open market today. An average of similar items sold within the past year is a good way to assess FMV. This is usually roughly half of what you paid for the item but is still more than the depreciated value for items that have been in use for a number of years. In some cases, manufacturing equipment or vehicles may be so old that they are worth substantially more than was paid for them.

Next, determine if you own any proprietary information. Companies that own patents and routinely research and develop products will have more inherent value than companies that simply manufacture items. Valuation of this type of information can involve adding the amount of revenue previously generated by this information with anticipated revenue. This type of intangible asset can be worth more than all the equipment your company owns. Human resources are also an important part of a company’s intangible value. For more than the salary paid them, people who give their experience and expertise lend real value to a company. Imagining how much less your company would be worth without key employees will help you assign a dollar amount to having that person on your team. When you are illustrating value, provide detailed information about employee knowledge and how specific employees and departments have directly contributed to the bottom line. Priding yourself on hiring good people is a way to increase worth within your company.

Without customers to utilize it, the best employees and information in the world are worth very little. A good customer relationship management tool can help you compile customer information and determine how many and what type of customer utilizes your business. While you will have already accounted for the revenue they provide, your customer list is an item of value all on its own. Be sure to keep this information safe, as customer lists are full of personally identifiable information and the loss of this material could mean the downfall of your business.

How Value Can Sell Your Business

Creating value to sell your business is one of the most crucial roles you can have as a business owner. There are a number of ways to create value, and each one can add to the overall price your business can command when you are ready to sell.

When searching for ways to sell your business, you first need to know how it is valued. Once you see the true picture of value, you can utilize this measure to generate interest in your business. Profitability and market share are two ways that a business can differentiate itself from similar businesses within the marketplace. Highly profitable businesses, or those with the potential to become highly profitable due to a large market share, are usually the easiest businesses to sell, because they are perceived to have high value. Increasing profitability for the short term can create value and improve your short-term statistics, even if the increase is not sustainable long-term. In turn, this can drum up interest in the purchase of your highly profitable business. Becoming rapidly profitable in the short term can also bolster your company’s financial snapshot by providing an example of revenue growth. Investors and people who are looking to buy their own business are looking for profit and the ability to generate more of it.

Believe it or not, intangible qualities like customer relationships can sell a business. One of the surest, but not the easiest, ways to create value in your business is to maintain relationships with customers long-term. Relationship duration can be spurred by having customers that are highly satisfied with their business relationship, even if it is not mutual. Consider keeping some of your less desirable but long-standing customers if you are planning to sell your business soon to improve this value.

For companies that are not publicly traded, that is, the majority of businesses, value can be determined by a number of valuation methods. Customer value within the products or services you sell, actual revenue, value of tangible assets, and intangible things like insider knowledge, business agility and adaptability are all things that add to the total value of a business.

In the case of publicly traded companies, shareholder value is one of the primary measures of market value. A rough measurement of stock value is the number of outstanding shares times current price per share. Some companies offer dividends, an action that typically designates a company as successful and increase shareholder value. Things like stock splits and shares reduce this value, but an increase in stock prices can offset this decrease.

Is Buying A Business The Right Choice For Your Investment?

Opportunities to buy an establish business abound, particularly when considering the manufacturing sector. With so many people willing to sell, you need to choose carefully to avoid buying a lemon. Carefully consider this weighty decision’s strengths and weaknesses before buying a business.

Advantages

A well-run, well-known business that has been running for a number of years is something of a gold mine. The best businesses have such well-designed management that they practically run themselves, with very little input, either financially or managerially, from the owner. Choosing an existing business with a loyal client base and well-equipped premises will remove a lot of the guesswork for you. In the manufacturing business, once the initial establishment and groundwork has been done, there is little to do other than finding qualified help. The best business to buy will have a proven record of performance and meeting its financial obligations, making it appealing to investors. One of the best qualities of buying an established business is that the market and customers have already been located. Personnel, departments, and activities are all already in place, all you have to do is evaluate whether they work and implement new strategies if you do not think the existing ones are effective.

Disadvantages

Unfortunately, not every business is a good business. It will become perfectly clear within a relatively short amount of time if you buy someone else’s problem. Whether suffering from run-down equipment, a slew of new competitors or severe cases of mismanagement, this type of business is a poor risk. In some cases, you can acquire this type of business at a bargain price and use your knowledge and skills to polish up a diamond in the rough.

There are several problems associated with standing businesses, especially those that are, for one reason or another, much less expensive than similar companies within the area. Performance may be lacking due to old, outdated equipment or poor-quality staffing. If the former, you will have to purchase more, newer equipment to correct this oversight. While staff can always be fired, it is usually easier to provide that existing staff will have the opportunity to interview for the same position within the new company. Rolling over current staff into the same position within your company may result in negativity and a sense of walking into a minefield. It is best to treat staff individually to be sure they are the right person for the job.

You can inherit someone else’s wreck if you leave all the existing contracts in place within a business that is clearly losing money. Being prepared to renegotiate terms with existing customers and suppliers can help you avoid leaving money on the table. In some cases, renegotiation is not an option, so you may be forced to honor a contract that is losing you money.

A Business Makeover Can Help Sell Your Business

If you’ve ever watched a show about selling homes, you know that staging, or creating the right appearance, is important for attracting buyers. Businesses can use a tidying up, too. The process and practice may be different, but the result is the same. Helping your business look its best with the help of a few simple tips can generate a quick sale and extra income for you.

External Appearance

Just like when selling houses, curbside view is important. The first thing that a buyer sees when he or she approaches your business may be the imprint left on the mind’s eye, so you want that portrait to be a good one. Walk around the premises with a critical eye. If you see something that needs an easy fix, do it! While you are not going to shell out for new brick facing on a building, you can have your brick washed and cracks in the mortar re-grouted for a fraction of the cost. Wood window frames usually look better with a fresh coat of paint, and sealing around them can decrease utility bills for you and the potential new owner. When you are preparing to sell a property, landscaping can be extremely helpful. With your utility companies’ permission, you can arrange to have a wooden fence placed around unsightly utility boxes. A landscaper will be able to tell you where to plant trees and bushes to improve visual balance and draw the eye to the most desirable features of a building while concealing those that are likely to detract from sale. Remember to allow a few weeks after any large renovation project for the landscape to heal and the facelift to look natural. You do not want your potential buyer to be so distracted by the lines in your freshly laid turf that they miss an important selling feature.

Interior Clean Up

Staging and cleaning house is important on the interior of your business space, as well. If you own a manufacturing business, sell or remove all obsolete items or those that are poor movers. You may have to take a minor hit to do this, but taking that loss can look better on the books than having thousands of dollars’ worth of stagnant merchandise. This will eliminate any need to value old merchandise and can still add to your sales figures. Not only can this improve your financial standing, but also it will certainly improve the appearance of your premises. Sale preparation is also the perfect time to clean out old equipment. Spare parts and old machinery laying around idle decreases the dollars per foot generated on a manufacturing floor, an important indicator of worth. Cutting through the clutter will allow prospective buyers to see where they could place more equipment to generate more revenue. In addition, you can benefit from the sale of obsolete equipment, either through sale to another business as a useful piece or as scrap.