Valuing a Business

The first step to selling you business is determining what the business is worth. But how do you determine the value of a business? Sunbelt Business Brokers is here to guide you through the valuation process and identify the approach that is most suitable for you and your business. We sell more businesses than anyone else in the world – so we know a thing or two about valuations!

How Much is My Business Worth?

To put it simply, a business is only worth as much as a buyer is willing to pay for it. When valuing your business, it’s important to take a step back and look at the bigger picture. It is not unusual for a business owner to be emotionally attached to his or her business. After all, it’s like your baby! You’ve built your business from the ground up and now its time to give it away – for a price.

Oftentimes this emotional connection leads to a valuation gap, in which a seller thinks his or her business is worth more than the buyer thinks it is worth.

Tools for Valuation of a Company

To determine the value of your business and close a valuation gap, it is crucial that you receive a formal business valuation from a certified business appraiser. Numerous nationally recognized associations certify business appraisers such as American Society of Appraisers, National Association of Certified Valuators and Analysts, Institute of Business Appraisers, and International Society of Business Appraisers.

Business appraisers often look at your business’ cash flows, risks, and goodwill. Whether your cash flow is expressed as EBIT, EBITDA, Free Cash Flow, or Seller’s Discretionary Earnings (SDE), the appraiser will evaluate the amount of cash flow and the degree of risk associated with that cash flow. Ultimately, buyers are looking for businesses with high cash flows and low risk.

If you’d like to get started on your own, looking at business listings by industry and location can give you a good idea of what companies similar to your own are selling for. Consider looking at BizBuySell or Sunbelt’s Businesses for Sale database for a variety of listings. It is important to remember that while a business might be comparable to your own, no two companies are the same.

How to Calculate Business Value

Various approaches may be used when calculating the value of a business. When choosing which approach is best for you, one must consider the size and nature of the business.

• Asset Approach: The asset approach is the most common approach to valuing a business. The goal of this approach is to find the net asset value. To find business value, you’ll need to find the fair market value of assets less liabilities. Under this approach, sellers often use the asset accumulation method and capitalized excess earnings method.
• Market Approach: As the name implies, market approach to valuing a business, looks at the marketplace to determine value. This may include analyzing historical sales, industry trends, and more. To calculate the market value, business brokers and professional valuation appraisers have numerous databases and records. Under this approach, sellers often use the comparative transaction method.
• Income Approach: The income approach is based on the company’s ability to generate economic benefit, such as net cash flow. Under this approach, sellers often use the discounted cash flow method, capitalization of earnings method, and multiple of discretionary earning method.

If you are considering selling your business and are in need of a professional business appraiser, contact your local Sunbelt Business Brokers office. Many of our brokers are certified business appraisers or have established relationships with business valuation firms.