The value of a business is based on two things: what it owns and what it earns.
What it owns
A business has tangible and intangible assets. The tangible assets are the furniture, fixtures, equipment, inventory, and real estate. The intangible assets can include the trade name, contracts, leases, client lists, licenses, recipes, and patents.
What it earns
A business provides a certain financial benefit to the owner. The benefit generally comes in the form of business profits and a salary to the owner. It can also provide the owner with fringe benefits such as health insurance, a company car, or a retirement plan.
How value is calculated
Owner operated businesses with sales of $1 million or less generally sell for the value of the assets, plus one to three times the earnings. If the earnings are stable and growing, the value is on the higher end. If the earnings are variable or declining, the value is on the lower end.
Businesses with sales of $1 million to $10 million may sell for straight earnings multiples of three to six. A thorough investigation of the financial information is required to uncover the true earnings capability of the business. Again, if the earnings are stable and growing, a higher multiple is used. If the earnings are variable or declining, a lower multiple is used.
Businesses with sales of more than $10 million often have specific industry criteria, which may be applied to determine the value. At this level, Buyers may be paying for market share, rights to patents and processes, additions to product lines, or the benefits of strategic or administrative consolidation.
Rules of thumb
Most industries have one of more rules or thumb. However, they can vary widely and in most cases do not give an accurate value of a business. Since each business is unique, a particular rule of thumb can be off by as much as 100% or more. The business valuator will be able to decide what is the most relevant information about a business and then make an informed decision about its value.
The value of a business valuator
Business valuation is as much an art as a science. While the business valuator does employ standardized formulas and methods to calculate value, he works from assumptions that are based on his experience in the market place and his familiarity with the similar businesses. This process includes the selection of the most appropriate risk and return variables. In this way, his applied expertise leads to the best calculations of value for a specific business.
Preparing To Sell Your Business
At The Sterling Business brokers we are acutely aware of what it takes to sell your business.
Preparing the seller, and aiding the seller in preparing the business to achieve the maximum gain from the sale, are two important roles of the professional intermediary. Owners sell their businesses for reasons stemming from retirement, partnership disputes, personal relocation, family concerns, the desire for change, illness, or to enter another business venture. Knowing the reason for the divestiture aids your The Sterling Business professional in structuring the most advantageous transaction. The Sterling Business brokers turns to its professional alliances to help you seek the appropriate tax strategy, succession plan, or investment strategy to again help you maximize the benefit of the sale.
• Having provable books and records increases the numbers of potential buyers
Buyers want proof of sales and profits the business has attained in the past
• Expectation of a reasonable price and terms
Educated buyers only consider competitively priced businesses
• List of assets including furniture, fixtures, and equipment
A complete inventory that can be referenced during inspection
• Attractive lease
Knowing the terms of assignment or of a new lease
• Best possible appearance
Having the business premises neat, clean and in good repair
• Valuing the business properly
A valuation on the business creates a document that proves value to the buyer and shows the business to be competitively priced
• Covenant not to compete
Preparing the terms of non-competition within an appropriate distance and for a reasonable period of time
• Reason for sale
Buyers will want to understand the reason for sale and be comfortable that there is not undisclosed information that could
negatively affect their investment in the future
• Time is of the essence
Be prepared to move forward when a qualified buyer shows interest in the business
• No surprises!
Most adverse situations, such as landlord problems, outstanding loans, tax arrears, unfavorable equipment leases, and even
non-compliance with zoning, health or other regulations, health or other regulations,
can be overcome if known by your professional The Sterling Business Intermediary
LET THE STERLING BUSINESS BROKERS SELL YOUR BUSINESS!
The Selling Process:
(312) 799-9436 | (312) 305-4678
Regarding selling or buying a business.
We welcome your call and will earn your business.