Checking the value of your business regularly will provide another measure of your progress toward goals of retirement, financial independence, and personal freedom. While it is a good idea to have a professional appraiser to prepare a valuation for any legal or accounting purposes, there are a few rules of thumb to follow when calculating the market value of your business. Be realistic about the market value of your assets, be aware of your competition and the life cycle of your industry, research the market multiples for your business and any comparables available, and if you are contemplating the sale of your business within 2 years or less consult a business broker. The value of business assets can be the prime source of contention between buyers and sellers. Buyers don’t place much value on furniture, fixtures and equipment; inventory is usually valued at a percentage of cost, and accounts receivable is often left for the seller to collect or valued at a percentage of current accounts. You may be asking, “What is most valuable in my business?” The answer for most buyers is cash flow and real estate. Many businesses do not have real estate, and real estate should be valued separately, so cash flow is what the buyer is looking for. The buyer wants to know, “What income can I expect in this business and how long will it take me to repay the loan to buy it?” Some multiple of earnings is usually the buyer’s determiner of value. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a popular measure of income for a business investor. For many individuals looking for a job where they are their own boss, seller’s discretionary earnings (SDE) is the income measure to use. Buyers have different criteria when evaluating a business investment opportunity, but rate of return on investment is central to most decisions. Your experience, knowledge, database of customers, company secrets, or any other key factors that differentiate you from your competition can also be your most precious assets. But, they can also be hard to value. The buyer may also be afraid that your knowledge and experience cannot be easily transferred. It is important that you have good documentation of the processes that make your business work well. Your knowledge of the industry business life-cycle is also crucial in determining the best time to make changes in your product/service/price mix, or when to exit your industry. The best perceived value of your business is likely from another business owner in your industry who wants to know what you know and respects you as a competitor, supplier or customer. Most purchase agreements contain consulting and non-compete provisions which may affect your future earnings, so be sure these are addressed before settling on the final offering price and terms. Price-to-earnings or price-to-sales ratios are popular rules of thumb in many industries, and they are misused more often than not. Businesses with similar sales numbers can have drastically different profits. Comparables are also helpful, but only if you can find several businesses similar in industry, size and geographic location. It is a good idea to use an average of several measures to calculate a market value for your business. There are several publications that offer rules of thumb for business valuation. Business Reference Guide by Tom West is a good reference book for business brokers or someone thinking of buying a business and not sure what is a good business to buy or how much to pay. There are also several on-line subscription services for business benchmarks and sales comparables such as Bizstats www.bizstats.com and Bizcomps www.bizcomps.com. Inc magazine also has great resources for estimating the value of your business http://www.inc.com/magazine/20070101/features-valuationguide.html. You could also call a business broker to take an objective look at your business and prepare an opinion of value for you.

If you are considering the sale of your business within two years, you should consult a business broker to help prepare your business for sale. Many business owners do not realize that their business is not saleable in its current state until they need to sell because of illness, retirement, relocation, etc. Having at least 2 years tax records on hand as well as a current Profit & Loss statement and Balance sheet are essential for preparing a valuation. There are more documents needed for a sale, but your broker can advise you what to prepare in advance of a purchase agreement. Look for a broker affiliated with a national company who has access to all of the nationwide marketing, valuation tools and market knowledge to advise you of industry trends, rules of thumb and buyer financing opportunities. You should also ask if they cooperate with other brokers or “co-broker” because you do not want to limit your buyer opportunities. The right broker will help you get a realistic idea of what your business will sell for and will make suggestions to help you get a premium sale price for possibly the biggest investment of your life.

Bryan Cook is a business broker and consultant based in Knoxville, TN
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