Today, we’re diving into one of the most critical steps of selling your business: understanding business valuation. Or, as I like to call it, How to Sell a Business 101: What’s It Worth?
So, you’ve built a fantastic business, nurtured it like a baby, and now you’re ready to let it spread its wings and fly to a new owner. But, before you slap a price tag on it, there’s something important you’ve got to figure out first—its actual worth. And trust me, you can’t just pick a number out of thin air. Tried it once myself; didn’t end so well. I even shared that story in my book, Maximum Exit: The Definitive Guide for Internet & Technology-Focused Business Founders (link below if you’re interested!).
What Is Business Valuation and Why Is It So Important?
Business valuation is like appraising a masterpiece of art. Except, instead of a canvas, you’re assessing a living, breathing entity that you’ve poured time, energy, and probably a few late nights into. It’s about quantifying all of that effort into a dollar amount that speaks to potential buyers.
Why is this so crucial? Well, imagine trying to sell a car without knowing its value. You might undersell and lose out on potential profit, or overprice it and scare away serious buyers. Not exactly appealing, right? The same principle applies to selling your business. You need that perfect “Goldilocks” valuation—just right.
With the right valuation, you’ll attract serious buyers, negotiate effectively, and ensure you get a fair price for your hard work. It’s your secret weapon in the sale process.
The Three Core Methods of Business Valuation
There’s no one-size-fits-all approach to valuation. It’s a combination of number-crunching and storytelling. So, let’s dive into the three main approaches used in business valuation:
1. The Income Approach: Show Me the Money
The income approach is all about that sweet cash flow. This method calculates your business’s value based on its expected income—essentially, the future dollars a buyer would take over once they own it. This method is typically applied in businesses with a consistent income stream and stable profits.
Using the income approach requires looking at metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization). Think of it as the bare-bones income potential of your business. This method tells buyers what kind of earnings they can expect and how soon they’ll get a return on their investment.
2. The Market Approach: What’s the Neighbor’s Business Worth?
The market approach is like looking at your neighbor’s house when selling yours. It’s all about comps—comparable sales of similar businesses. If other businesses in your industry and revenue bracket are selling for three times their annual profit, that’s a good sign of what yours might go for.
But here’s the tricky part: business sale data is often private. That’s where a business broker, like yours truly, comes in handy. With access to real-world data on comparable business sales, I can give you a reliable estimate.
3. The Asset Approach: Count the Toys in the Toy Box
Think of the asset approach as counting every toy in the toy box. You look at all the tangible and intangible assets of your business, from inventory and equipment to intellectual property and brand reputation. This method is typically reserved for asset-heavy businesses or those with significant physical resources.
The asset approach gives a floor value—what your business is worth if you liquidated everything today. While it’s not usually the go-to method for internet and tech businesses (which tend to be less asset-focused), it’s a good backup for understanding the full scope of what you’re offering.
Beyond Numbers: Crafting Your Business Story
Valuing a business isn’t all spreadsheets and financial jargon. Potential buyers want the story behind those numbers. They want to know about the unique value of your customer base, your growth potential, and the “secret sauce” that makes your business one-of-a-kind.
Think of it as “storytelling with a dash of number crunching.” A compelling story is what gives buyers confidence and sparks their interest. When you can illustrate what makes your business exceptional and sustainable, you’ll have buyers itching to sign on the dotted line.
Can You Value a Business Yourself?
Could you DIY your business valuation? Sure…if you’re feeling lucky. But it’s kind of like determining your home’s worth without an expert Realtor. You could try, but without access to real market data, it’s just a guessing game. When it comes to business sales, confidentiality is the norm, so you need to get data from a reliable source.
At Website Closers we sell over 300 companies a year, ranging from $500,000 to $100,000,000. With this level of insight, I can help you get a precise valuation based on current trends and market realities.
Why a Business Broker Is Your Best Friend in the Valuation Process
Let’s be real: selling a business is no walk in the park. But a business broker? That’s your navigator, negotiator, and data guru all rolled into one. With access to private data, market insight, and valuation tools, I can guide you every step of the way.
Here’s the process I typically follow to value a business:
- Step 1: Start with the Income Approach. I’ll analyze your financials to determine what income a buyer would be purchasing.
- Step 2: Apply the Market Approach. With insight into what other businesses like yours are selling for, I can calculate a reasonable multiple of your earnings.
- Step 3: Combine both methods to offer a valuation that accurately reflects the value your business brings to the table.
With this multi-layered approach, I can help you set a price that buyers will find attractive—and fair.
Getting Ready to Sell: Key Prep Tips
So, you’ve got a ballpark figure, but there’s still some prep work. A few key things you’ll want to have in order include:
- Detailed Financial Records: Buyers want to see a solid, transparent track record.
- Streamlined Operations: A business that runs like a well-oiled machine is far more appealing.
- Solid Customer Relationships: Showcase loyal customers or contracts that will transfer smoothly.
- Growth Potential: Show that there’s room for expansion or improvement.
FAQs: Your Burning Questions Answered
Q1: Can I use more than one valuation method?
Absolutely! In fact, using multiple methods offers a comprehensive perspective that appeals to buyers.
Q2: What if my business has a lot of intangible assets?
Focus on a narrative that explains the value of your brand, customer loyalty, and market position, as well as applying the income approach.
Q3: How often should I re-evaluate my business?
Annual valuations are ideal, even if you’re not planning to sell, to keep your business goals aligned.
Q4: Can I skip the broker?
It’s possible, but brokers offer invaluable insights, data, and negotiation experience that often lead to a better sale price.
Q5: How do buyers view growth potential?
Buyers are keen on growth potential. Highlight clear pathways for expansion and any advantages over competitors.
Ready to find out your business’s worth? Send me a message! And while you’re at it, hit that subscribe button, give this post a thumbs up, and check out my book Maximum Exit—it’s got everything you need to make your business sale as smooth as possible.