Selling your business will probably be the largest financial transaction you will ever undertake.
Getting the right price is crucial. You will have worked hard over years, maybe even decades, and will want to maximise the amount you receive.
Most advisors recommend formulating an 'exit strategy' before you even start a business; selling it when you have achieved your objectives, financial or otherwise, is the most common route.
But even in a successful business, a sale can be precipitated by other factors - personal problems, for example, or disagreements among partners or directors. You might receive an unsolicited approach from a company, offering significant amounts of cash for your business. More commonly, you might realize that the current economic climate is good for a seller.
In an ideal world, you should aim to sell when your business looks set for growth: when turnover and profit is up, and when buyers will be keen to get a share of the action.
Of course, some business opportunities are sold because the owner feels they are unsuccessful or are likely to become so in the future - but this doesn't mean they are worthless. Certainly, even during the current downturn, there is plenty of evidence at BusinessesForSale.com to suggest that buyers (with cash) are in the market to buy opportunities.
Even during a downturn, it can be a good time to sell. In most cases, businesses have some form of assets, real or otherwise, that will represent value to the right buyer.
Understanding the business valuation process is important because it will allow you to understand the 'mind' of that business buyer. It will also help you to maximise the value of the business - by realising what you need to do to prepare a business for sale.
Art not science
Many commentators claim business valuation is an art, not a science. Renowned financial journalist Michael Brett once quipped that, in that case, it is the only form of art that regularly appears on company balance sheets.
What is really meant by this phrase is that valuation involves a lot of guesswork and lateral thinking. There is no 'right' figure - it could be worth half as much to one buyer as another.
If your main product is a widget and demand suddenly surges in Brazil, this ratio could be one to three, or one to 10 if investment bankers have suddenly decided to take an interest in your sector.
If you are selling a house, valuers can use the sale price of other houses in the same street that were sold recently to reach a figure. But this method does not work well in valuing a business: it is highly unlikely that one with the same number of employees in the same part of the country will have been sold within the past month or so.
Business valuations, even when carried out by experienced corporate financiers, can go horribly wrong - for example, eBay now admits that it vastly overpaid for Skype, the underperforming internet telephone company which it bought for $2.6bn in 2005. Conversely, there are a host of examples of stock-market analysts criticising acquisitions that subsequently outperform all expectations.
Nevertheless, there are four models you should consider using to estimate the right price for your business: asset-based, price/earnings ratio, entry cost and discounted cash flow. Some are more appropriate to particular sectors or company types than others, but there is no absolutely correct approach for any business.
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