How much is your business worth? That’s a subjective question–and one that many business owners struggle to put a number on. Still, when it comes time to sell or secure capital for a strategic move, it’s a number you’ll need to know.
If you’re looking to sell a business, there are several online portals that make the process easy. Let’s take a look at a few quick ways to value your business.
What You Need to Get Started
Before you can begin crunching numbers, you’ll need to collect a few documents that will provide the information that you need. These same documents will eventually serve as documentation for the buyer as you enter into negotiations and close the deal.
1. Gather your financial records: This includes profit and loss statements for the past three years, all documents related to tax filings and returns, as well as an overview of business finances.
2. Inventory Your Assets and Liabilities: Make a list with current values and liabilities against tangible assets like real estate, equipment, inventory, and cash on hand. Then, collect documentation on intangible assets like patents, copyrights, trademarks, customer loyalty programs, and other first-party customer data sources. Your liabilities should include all loan balances, accounts payable ledgers, and other debt.
3. Business Plan & Operating Model: Make sure that these documents are up-to-date, including accurate projections for earnings and growth. Your business plan should provide a snapshot of what your business provides with a breakdown of revenue sources.
4. Industry Research: Spend a few hours collecting surface-level data on competitors in your market to support claims of how competitive your business is and what opportunities for growth might exist. In real estate, this is comparable to ‘comps’ or comparing the values of similar properties that have recently sold.
Seller’s Discretionary Earnings (SDE) Method
The seller’s discretionary earnings (SDE) is an income-based model that works well for small businesses. Larger corporations tend to use a similar model called EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization.
Essentially, as the business owner, you can take your income and add back in all of the things that you might have taken as tax deductions, like income, interest, and one-time business expenses. This might include:
● The Total Salary of All Owners
● The Salaries of Family Members Employed in Non-Essential Roles
● Perks Like Company Vehicles or Travel Stipends
● Interest, Depreciation & Amortization
● Charitable Donations
● One-Time Expenses Like a Settlement
● Personal Business Expenses Like Mileage, Meals, or Travel
Once you’ve totaled up your SDE number, the next step is to choose a multiplier. This can be one to four times the total SDE and is based on unique factors like current market conditions, geographic-related risks, company size, and assets.
Multiply the SDE total by the chosen multiplier, taking into consideration industry-specific conditions and business-specific assets and liabilities to produce a valuation number that can provide a starting point to list your business for sale.
Asset-Based Value Method
This is a no-nonsense approach to determining the base value of a business. It’s often the metric that is used in liquidations. Using this method, the seller simply lists out the assets and subtracts the liabilities to see what is left over. That number is the bottom-dollar valuation showing what the business is worth.
The asset-based method is simplistic and easy to show on paper but often doesn’t represent the full value of the business in terms of future potential. For that reason, many business owners prefer alternative methods.
Final Tips for Valuing Your Business
Putting a number on the value of your business can be as complex–or as simple as you want it to be. To ensure that you’re considering the full value of your business, begin by collecting as much information as possible related to financials, assets, liabilities, and current market conditions.
You can pull numbers from these documents to quickly calculate a base value for any business. The important thing to remember is that a failing business doesn’t mean a worthless business. If you’re ready to move on, check out this guide on selling a failing business for a step-by-step process that you can do yourself.