One of the biggest challenges business owners face when deciding to sell is knowing the true value of their business. That’s why I recommend before even thinking about selling, you get a good handle on its worth.
Consult a Valuation Expert
I get asked all the time to confirm a business’ value. The problem is, an accurate valuation relies on many factors such as your industry and the size and scope of your company.
That’s why I recommend you consult a valuation expert for a formal valuation. Not only will this be the most accurate number for you, but you can also benefit from their expertise and objectivity.
Methods of Valuation
There are several methods for valuing a small business. The most popular method is the EBITDA method.
EBITDA (earnings before interest, taxes, depreciation, and amortization)
EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization. Typically it’s better to have a high value for this metric rather than a low value. However, the EBITDA calculation is just the first step.
Although it’s a key part of the overall company valuation, it doesn’t provide the full picture of a company’s financial health.
As a result, it is not an appropriate measure to use as a single measure of profitability.
Adjusted EBITDA is net income adjusted to include non-recurring, irregular, and one-time items that may change EBITDA.
These include –
- Single-time loss or gain
- Non-operating income
- Intangible costs such as losses from natural disasters or economic shutdown
The adjusted EBITDA is the most helpful number when determining the value of your business.
Finding the EBITDA Multiple can be tricky as it varies by industry and market conditions (among other things). The best thing you can do to establish the multiple that applies to your industry is to ask your accountant or an Account Director at the bank to help you.
Getting Ready to Sell
Several factors come into play when determining a reasonable asking price. These include competitive advantages, growth opportunities, and historical financial performance.
However, as discussed, the EBITDA can be a great starting point in measuring your business’s potential value in a sale.
In the end there are two important things you can do to decide on the right selling price for your business.
- The first is consulting a Valuation Expert.
- The second is keeping your emotions out of the metrics.
Entrepreneurs experience a wide range of emotions during the sale process and if those emotions are left unchecked, they can have a real dollar impact on the outcome of your business sale.
Throughout this process, focus on managing the emotional toll of selling your small business so you don’t risk your emotions hijacking the sale of your small business.
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I’d love to know? Do you think you can sell your business yourself? Or maybe you need advice if necessary? Comment below and let me know how we can help because we have tons of FREE resources to help you build, scale and sell your business.