There will be a time when you, as a business owner, might decide to sell your business. It could be because of retirement or because you are now ready to take another challenge in your life. Nevertheless, in deciding to sell your business, you need to start with establishing the listing price of your business.
Getting the value of your business is not as simple as generating numbers. It takes a lot of factors to decide your business price. One way to decide this is by getting a valuation or a business appraisal.
What is a business appraisal?
A business appraisal or valuation is the process of getting the present value or worth of the whole business. Experts who conduct this process use various techniques and approaches and look at factors like management of the business, probable income in the future and market value of the business assets.
There are various methods on how to determine the value of a business. Each approach uses a certain technique that best suits the type of business. Getting a professional appraiser will guide you in using the best approach to establish the listing price of your business.
Reasons for Getting a Business Appraisal
Knowing the in and out process of your business is important but aside from this, one important piece of information that you should also be familiar with is the value of your business. And this is not only during the time that you want to sell your business.
Here are some of the reasons why a company would perform a business appraisal.
- Exit Strategy Planning
Most of the time, selling a business is the reason for getting a business valuation. This is a crucial step during the price negotiation as you have to know the accurate and present worth of what you are selling in the market to prevent any capital loss. Business valuation can also help you in creating a plan to enhance your business image and profits, and thus also increase your business value as part of your exit strategy.
Business appraisal that has updated records of your annual finances can protect your business from any unexpected events. Selling your business is a long process so it is better to perform an appraisal during early planning so you can achieve your desired outcome.
- Estate Planning
Being knowledgeable when it comes to your business value can help in settling your future estate tax liability. Regardless of the size of your estate, you will still need a documented business valuation to help minimize your tax exposure.
- Funding
When looking for additional funding, a comprehensive and objective business appraisal can certainly help you. With a formal business valuation during your negotiations with banks and other potential investors, you can well present your business value and increase credibility. When you have high business value, this can attract investors to invest more in your business.
- Litigation
It is important to have a business valuation during cases when the value of your business is an issue like disputes, injury or divorce. An objective valuation can help in negotiating a pretrial deal or in case of a court case, this can provide the figure of your business actual value.
- Managing your business
With a business appraisal, you can see where your business is currently at in the market. And by knowing this information and with the assistance of an expert appraiser, you can identify what changes need to be done in your business in order to increase its business value. You can also better allocate your resources to drive your business to unstoppable growth.
DDDC Business Advisory is a group of professional appraisers that can guide you in maximising the value of your business.
Methods in Establishing the Listing Price of Your Business
There are different methods or approaches that business valuation experts use to determine the value of a business. The accuracy of the valuation depends on the data or information collected so be ready to provide details of your revenues and expenses, liabilities to banks and other similar organisations, and your financial records.
- Market Approach
This is the simplest and the most widely known method of business valuation. In this kind of approach, similar companies to yours are analyzed to determine your business value. An expert appraiser uses a database and public and private business listings to compare the prices of similar businesses.
- Asset Approach
In this approach, the appraiser measures the fair market value of the assets of a business less its liabilities. This includes all tangible assets such as the business equipment and land.
This kind of approach is usually used for businesses like real estate firms, manufacturing companies and the likes which are asset-intensive businesses. Experienced appraisers often also use this for underperforming businesses or those whose earnings are not sufficient and the return of assets are not justifiable. But the asset approach is not suitable for businesses with loads of intangible assets.
- Income Approach
Appraisers often use multiples to calculate the value of a business. Valuation multiples such as revenue and cash flows are the most commonly used.
The income approach is simply based on the projected return an investor requires and the net income that the business made. This kind of approach is best to use for income-generating businesses like commercial buildings and apartment rentals.
This approach is very direct and easy to understand especially if the business is expected to generate future income and expenses that are easy to measure and predict.
Well documented and accurate business appraisal is important for establishing the listing price of your business. Business owners can project the value of their business but it is still best to leave it to the experienced appraisers to make sure that you will get the true worth of your business.
With DDDC Business Advisory, we value all your efforts in making your business a success thus we want to assist you in gaining the best for you and your business with our knowledge and expertise.
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Sources:
[1] Hayes, A. (2021, April 25). How to Value a Company. Investopedia.
[2] Morgan, J.B. (2017, May 8). 5 Reasons you need a business valuation. The Business Journal.
[3] Craig, H. (2020, October 27). Certified Business Appraisal: What It Is and Why It Matters. Fundera.
[4] Peak Business Valuation. (2020, September 1). Deciding on a Listing Price for your Business.