You’ve worked hard for many years building a successful and profitable business. Now, as you prepare to sell your business, the big question is: How much is it really worth? According to The BizBuySell Guide to Selling Your Small Business, what your business is most likely to sell for is based on a buyer’s assessment of financial statements, industry comparable sale figures, asset values, return on investment, and the goodwill worth of your business as a going concern.
Following these 6 key financial strategies will get you on your way to setting an asking price for your business:
Step 1: Get Your Financial Statements In Order. Consult with your accountant or bookkeeper and put together the following key financial statements:
- Income Statement – This should show your gross revenue, costs, and how much your business made or lost each year.
- Cash Flow Statement – This should show how much money was received and paid out of your business and how business assets changed as a result.
- Balance Sheet – This should show the value of all tangible assets owned by your business less the liabilities your business owes.
- Seller’s Discretionary Earnings Statement – This should show how much your business makes after backing out non-recurring and discretionary expenses.
Step 2: Estimate the Value of Your Business Assets. It’s essential to list and price all physical assets of your business, including furnishings, fixtures, equipment and inventory.
Tangible Assets – The worth of these items is important for buyers who require you to provide a complete asset list, including purchase prices and current market values. The worth of these assets is also very important in determining whether or not you should liquidate these assets before the sale.
Step 3: Prepare Your Statement of Seller’s Discretionary Earnings. Work with your accountant or bookkeeper to recast your business income statement into what’s interchangeably called a statement of owner’s cash flow or a statement of seller’s discretionary earnings (SDE). This is the basis for sale pricing and of primary interest to buyers.
Step 4: Estimate the Earnings Multiple That’s Likely to Apply When Pricing Your Business. Most owners receive somewhere between one and four times the annual SDE (Seller’s Discretionary Earnings) of their business, with the multiple pegged to the attractiveness of the business being purchased.
Step 5: Do the Math to Arrive at an Early Estimate of Your Purchase Price. Based on how attractive your business appears in key areas that most affect its future success under new ownership, you can multiply your annual seller’s discretionary earnings by your estimated earnings multiplier to arrive at a preliminary estimation of your business purchase price.
Step 6: Do Some Price Checking. After arriving at your estimated purchase price, conduct the following research: 1) Search BizBuySell.com to research other listings and sales in your business category, market area, and price range.; 2) Use the BizBuySell Valuation Report Tool to gain insights into selling prices of comparable businesses.; 3) Work with your sales adviser to see how your pricing syncs with the prices of comparable business sales.
For more detailed information on how to prepare your business for sale, including marketing your business, finding the right buyer and closing the deal, download BizBuySell’s free book The BizBuySell’s Guide to Selling Your Small Business.