5 Most Important Business Skills Every Entrepreneur Must Have
Written by: Patrick Findaro
Last Updated by
Brenda Bagnoli: August 22, 2022
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Personal feelings can certainly get in the way of buying or selling a business. When performing a realistic valuation and an accurate overview of the business, it is best to have an objective approach. This is why the use of professional business brokers and accountants can help in today’s market in analyzing the business.
Several methods can help in the business valuation process, but these methods vary depending on the type of business or what industry it is in.
Contents
1. Seller’s financial statements
As a general rule in business, the valuation process will begin by gathering the organization’s previous three years’ financial statements, which include balance sheets, cash statements, and income statements. Projection models help if the business has not operated for more than three years.
An accountant is important in creating a seller’s discretionary earnings (‘SDE’) statement from the income statements. The SDE statement can change certain expenses such as the non-recurring and discretionary expenses into a statement that can help reflect the valuation of a company.
2. Establish the asset value
The value of a business can be assessed through the value of its assets, which include both tangible and intangible assets. Tangible assets refer to those physical items that can be inventoried and valued, which include office equipment, fixtures, or other physical items of value that is a part of the business.
Intangible refers to those assets including contracts, company brand, intellectual property, partnerships, business models, or strategic ideas. An accountant could help in valuing intangible assets.
Asset valuation gives you a limited scope on the valuation of a business and does not predict the potential earning value that the company can accomplish.
3. How to Value a Business: Price Multiples
Price multiples can help determine the value of a business by predicting the potential future earnings. Also can be used to estimate what their Return on Investment (‘ROI’) may be in the future. This can be added to the seller’s asking price.
When the business’s valuation has been sufficiently determined, the seller should decide on what multiples to apply to their business based on industry and geographical location, which will be inputted into an equation to determine a fair price for the sale. The right multiplier is the trick to determining the perfect sales price for a business.
4. Using Comparables
A great way to determine how much to sell a business can come from comparing their business to their competitors by looking at the recent sales of similar businesses that are in the same industry and location because then you would know the asking price of other sold businesses and can use this metric as a guideline.
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5. Improve the value of the business
However, not every business owner is satisfied with the end-product of the business estimate at the end of the process. The good news is that this return can be improved, but the process will take up much time and should be started as soon as the owner decides to sell the business. Improving the business is important because buyers are looking for a business that will provide a good ROI.
The ease of transition into the new business is also an important part of a potential buyer’s decision. It would be ideally better to invest in a business that has a much easier transition. And the least disruptions to business flow when the company changes hands, such as having a proven track record, establishing policy, detailed records, and renewable contracts.
If the commercial entity offers a good transition package, it will be more attractive.
One other technique that will spark interest in a potential buyer is the opportunity for seller financing. If the vendor offers partial financing, there is a potential for higher prices, collected interest, and more interested buyers.
