Your business is your life’s blood but there will likely come a time when you’ll want to sell so that you can relax and enjoy life, or move on to another pursuit.
To do that, you need to establish a good business exit strategy. An important part of that business exit strategy will be to figure out how much your business is worth so that you ask for, and get, a fair price when you sell.
What Is My Business Worth?
There’s no set formula for figuring out how much your business is worth, but there are a few basic metrics you should look at to arrive at a realistic sales price. Choose the most appropriate one based upon your business’s industry and focus.
Depending on your industry, you can determine your business’s value by multiplying your company’s annual sales by a multiplier (specific number), such as three.
The multiplier will change depending on the exact industry you’re in, whether sales have remained steady, gone down or increased from year to year and how broadly sales are spread out among clients or the public.
If you depend on one client for 25% of your sales, for example, that increases perceived risk and therefore lowers the multiplier you’ll use.
- Profits or Cash Flow
How consistently able is your company to generate cash flow or profits? As the seller, you determine what this figure is and then project what that figure will be over the course of the next five years (or more), thus determining the value of the business.
You can use discounted future earnings to figure out the “time value” of the figure you arrived at, in that the cash or profits received in year number five may be discounted based upon what the projected interest rates will be.
If your business has been struggling in that you can’t count on profits or cash flow to be healthy enough to come up with a truly fair selling price based upon their business’s actual worth, you can use tangible assets to arrive at a value for the business.
This is a “rock bottom” selling price; if you’re simply choosing to sell the business when you want to exit and it’s doing well, you won’t even consider this approach. However, it’s worth knowing about in the event you’ll need it.
Intangible assets, such as word-of-mouth recognition, customer loyalty, trademarks and patents can also be used to increase the value of a business for this “asset-based” selling model, but be advised that buyers will often disagree with the increase based upon these factors.
Use your best judgement (along with that of any experts you hire to help you sell your business) based upon your company’s history and your experience to determine whether or not including intangibles is a good idea.
Get Your Sellability Score
It’s wise to plan ahead and figure out how much your business is worth now, even if you’ve no intention of selling. Revisit that figure every so often to keep current.
Coming up with a realistic selling price every so often gets you in the practice of evaluating your business’s worth so that you’re familiar with the process when the time does come to sell. At that point, you’re sure to get a good price with no worries that you’ve been shorted.
If you want to know more, download our free guide with 11 Ways to Ensure Your Business is Built to Sell