Calculating Value + Expectations of Sales Multipliers

When you consider selling your business, it is not uncommon to have little idea how to calculate value of your business or prep your business for sale. Trusting a business advisor or broker to help you learn everything from prepping for the sale, calculating value, and expectations of sales multipliers could save you time and sanity. 

 

Successful Steps for Prepping for the Sale of a Business

There is more to selling a business than hanging a "For Sale" sign in the front window. Several considerations help direct prepping for the sale:

 

Do you want employees, vendors, and customers to know immediately?

If you do not plan to immediately inform employees, customers, or vendors that you plan to sell the business, you need an advisor to confidentially work on the sale. Keeping plans to sell your business as quiet as possible involves making sure financial and legal advisors keep your intentions private. If word of your plans gets out, you run the risk of creating uncertainty at the very time that you need to increase its worth.

When should prepping start?

Begin prepping as soon as possible. Business Insider quotes Ryan Guthrie, Director of the Private Equity Practice, BDO USA, who explains, "The majority of business owners who sell their business don't plan ahead in preparation of a sale. In most cases, a lot of things that could have increased the value of the business and decreased the risk for buyers was not done."

When should I prepare financial statements?

Prepare audited financial statements at least two years in advance, preferably earlier.

Does making improvements really make a difference?

When you need to make improvements and fail to do so, you have the potential risk of having to offer price concessions to overcome areas of weakness in your business.

 

Calculating the Value - How and Why it's Important

There is no one-size-fits-all answer for valuing a business. Several factors go in to determining value, including fair market value, investment or strategic value, intrinsic value, and other factors.

Some business owners determine the value of their business on their own. However, prognosticating the value of your business can be tricky. Likely, this practice will result in either a price that's unrealistically high and turns off many interested parties, or produces a price that's unnecessarily low and keeps you from selling at full value.

 

Expectations of sales multipliers and how it makes your sale successful

Selecting the right multiplier becomes critical when valuing your business. Remember that a potential buyer does not have the same sentimental attachment to your business that you might have - and naturally so. Therefore, while you choose a higher multiplier based on what you determine as the proper sales multiplier, that does not mean it is the correct multiplier. You could even set the price too low due to using the wrong sales multipliers.

Using sales multipliers allows potential buyers to translate the purchase into earnings when basing price or value on some multiple of the business's earnings potential. When you use the right sales multiplier, it potentially attracts more buyers. The right sales multiplier potentially results in a quicker sale than if you allow your emotional attachment to get in the way of valuing your business. Talk with an advisor to learn more.