How to Evaluate A Business For Sale

Obtain Business Evaluation

In order to sell one’s business, the business should be evaluated by a professional business broker. For a first time business seller, the evaluation process may seem like a difficult task. In practice, the process is not so difficult so long as the seller is prepared with the right information and documents. Given accurate and thorough information, it should not take long for a professional business broker to properly evaluate a business for sale.

Analyzing Company’s Financials

  • Business valuations ultimately depend on the seller’s adjusted owner benefit.
  • The adjusted owner benefit is defined as the seller’s true economic profits which includes the owner’s salary, personal expenses of the owner paid by the business, irregular expenses not to be incurred by a buyer, depreciation, and even unrecorded cash sales (if provable).
  • In order to determine the adjusted owner benefit, the business broker must generally analyze the company’s historical tax records or profit and loss reports.
  • The seller should always remember that disclosing these documents to the business broker is strictly confidential. The information will only be shared with fully qualified buyers who must sign Non-Disclosure Agreements.

Trajectory of Financials Important

In reviewing the company’s financials, it is critical to determine whether the company’s sales and profits have been growing or falling over the last two or three years (or more). If they are falling, then a coherent and reasonable explanation must be given. Hopefully, the reason(s) will persuade a buyer that the trend can be reversed with new management or with more favorable business conditions. If sales and profits are growing, then the trend should be highlighted in the information presented to buyers, and should be reflected in the company’s valuation.

Most Recent Financials Most Important When Evaluating Business For Sale

Irrespective of the company’s trajectory of sales and profits, buyers want to see the most recent financials available. If, for example, the business evaluation takes place in September of 2021, a buyer will typically not be satisfied with 2020 financials. They will also want to see the interim (or year to date) financials for 2021. A buyer wants to know what they will make from the business after the closing. As a result, the buyer will want to know to the best extent possible what the company is currently doing. The most recent financials possible should be given to the business broker in order to make the best evaluation possible.

Physical Assets of Business Key Part of Evaluation Process

  • A business seller should have an equipment list ready for the business broker’s review at the evaluation meeting.
  • The equipment list does not need to list every single item of company-owned equipment.
  • Rather, the list should identify the major pieces of equipment (such as vehicles and any movable item owned by the company worth more than a couple thousand dollars or so) as well as their estimated depreciated value.
  • Additionally, the business seller should have an idea of what their current inventory is worth at cost.
  • Inventory (unlike equipment) consists of items that may be sold to the public.
  • Often times, inventory is not included in the business evaluation and is sold separately by the seller to the buyer at cost.

Seller’s Role in the Business Must Be Evaluated

An often overlooked part of the business sales process is determining how the seller (and potentially family members of the seller) will be replaced by the buyer of the business. An important factor of the evaluation process is exploring the precise role of the seller (and family members of the seller) in the business. The more absentee a seller and their family members are in the business, then the easier it is for the buyer to step in and assume the ownership role. This generally results in a higher valuation of the business. If the seller does have an active role in the business (which is typically the case), then they should plan for a smooth transition after the sale.

Explore Unique Aspects

Many businesses have unique aspects that often time consists of competitive advantages which enhance its valuation. Many retail-related businesses have favorable leases or locations that add to its valuation. Many service-related business have valuable licenses or long term contracts with customers that significantly enhance their valuation. A thorough discussion and understanding of the company receiving a business valuation must take place.

Determining the Best Asking Price of Business For Sale

All of the above factors come into play when determining the best asking price for a business. Unlike with real estate, ‘comps’ (or comparable sales) in the world of business sales are often misleading because each business is so unique. Valuations vary by industry and with business conditions, but typically are a range of between 2-4 times the adjusted owner benefit. Large businesses with strong competitive advantages often significantly higher multiples.

A well prepared seller with the correct documents and information for the evaluation process (and the right business broker!) is sure to have the best possible chance of receiving the best possible purchase price.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.