How to Value a Small Business With a View to Selling It

Seasons change.

Your perspective on business ownership has shifted slightly and you feel the urge to assess your options.

Now you’re considering just how much all those years of building and nurturing your business are actually worth on the open market? You hope you have at least enough to take you to your next destination, plus a little change for the road ahead.

How would you go about getting a ballpark figure to set your exit coordinates?

1) Business brokers
These experienced consultants are a valuable first step in assessing the value of any small business. Known to be expert negotiators of the sale of most small businesses, business brokers earn their fee as a middleman on behalf of the vendor, seeking to attract the best possible sale price. They will entertain talking to a business owner looking for a no-obligation valuation, according to their vested interest – you should walk away with an accurate estimate from a broker.
2) Business for sale website
These are online marketplaces promoting small businesses for sale. They will present vendor businesses in useful categories, to assist prospective buyers in comparing ‘like for like’ opportunities. Websites like www.uk.businessesforsale.com will give you an idea of the asking prices which enterprises like yours will fetch with real world buyers.
3) Your accountant
Always a stickler for sound metrics and financial prudence, your chartered accountant is a solid source for an accurate business valuation. They’ll have a very technical approach to assessing value which may leave your head spinning with phrases such as EBITDA and Amortization. Nevertheless, the result will be a number which you can quote with credibility.

Can’t wait to speak to someone and want to work it out for yourself?

Having managed a nationwide business development campaign for one of the UK’s top independent  business brokers, our understanding of valuation techniques carries enough weight to relay the basics of a DIY calculation for the sale price of a small business:

Firstly, you’ll need to lay hand upon your financial business records for the last 3 years, or if you have that kind of data committed to memory, then even better! The figure you’ll need is the most recent 3 year average of what is known as EBITDA (‘EBITDA’ = ‘Earnings Before Interest, Taxes, Depreciation and Amortization’. Not to be confused with ‘SDE’, or ‘Sellers Discretionary Earnings’ = EBTIDA + compensation / benefits of a single owner. Using the wrong figure here can grossly distort valuation estimates). If you are unsure about your EBITDA figure – ask your accountant.
Now equipped with your the EBITDA figure, next you need a multiplier. This multiplier is a general yardstick when estimating the market value of small businesses, usually determined by private equity suitors. Common practice now is simply to multiply the EDITDA by ’7′, in order to arrive at your ballpark valuation figure. i.e. if your EBITDA was £100,000 then the value of your business by these broad brush stroke calculations would be £700,000.

What if the valuation doesn’t match the desired sum in your exit plan?

Exiting your current business at the right value in many ways dictates your access to further investment opportunities.

If your current EBITDA calculation falls short of your expectations to exit – the only answer is to increase your profitability by: (a) attracting new customers, (b) increasing the frequency of typical customer purchases or (c) increasing price of products or services.

In seeking professional help in this area, you might come across either a marketing consultant or a business broker who offers what’s known as a ‘business grooming’ service.

This process of shoring up your operation for greater profits will usually begin with some sort of appraisal. This will be a thorough look under the hood of your business to ensure all components of the engine room are up to the task.

This is a systemic evaluation looking at management, dependency (risk: too few customers or suppliers), intellectual property, or business intelligence, accreditations and much more.

The key is transparency
Make sure the value of your business is not buried away in it’s innermost parts, or worse still…in your head! If the gems are not easily accessible to a prospective buyer, you’re less likely receive any serious offers.

Work with a small business marketing company to organise and optimise the format of your critical business intelligence in order to maximise the value of your business.

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