South Jersey Business Brokers: Article About Two Common Types Of Business Valuation
Your South Jersey business brokers will perform a business valuation before listing your business for sale to determine how much your business is worth and the best price.
A common method used to value a business is seller's discretionary earnings (SDE). Seller's discretionary earnings is an estimate used to determine the annual amount the owner would earn on a yearly basis. Some brokers may call this the seller's discretionary cash flow or the adjusted cash flow. Your broker will look at your discretionary earnings over the last 3 to 5 years. SDE are calculated by looking at tax returns, income sheets, and other financial documents.
Mistakes can be made during a valuation. For example, the value can be miscalculated when there is more than one business owner, certain expenses can be valued as discretionary when they are not, and unreported income can be added to the value when calculating SDE. Also, in some cases, the SDE valuation isn't as accurate as other types of valuations. This is true in cases where the buyer can use the assets of the business in a different way from the current owner and make a much larger profit.
While there are advantages and disadvantages, the SDE method is fairly accurate at valuing a business correctly. With an experienced broker who has performed these valuations before, you can insure that your business will enter the selling market at a competitive asking price.
Another valuation a business broker can use if a business needs to sell quickly is an asset based approach. This is sometimes called a liquidation approach, and is often utilized when an owner is struggling with the business or needs to make a quick exit for personal reasons.
The business brokers from Selby Associates of South Jersey would be happy to answer any question you have about business valuations or business exit planning.
The business is valued as a sum of its parts, and the asking price is usually below the current market value on the business. The money earned from a liquidation sale is usually used to pay off debts. Using an asset based valuation is an alternative to going out of business and liquidating your assets to the public or through private auction.
A professional business broker will make a list of all your tangible and intangible assets. This includes, but is not limited to, fixtures, equipment, accounts receivable, vehicles, inventory, employees and customer lists. They may also add in the value of the location if you don't lease and will be selling the location as part of the business. However, your broker may suggest you sell the location separately in order to make money on the building.
The next step in valuing is where the expertise of your broker is imperative. There are two choices when valuing using the asset based approach and that is whether to use the book value or the fair market value of your assets. While you may get a buyer willing to pay book value, most want the cost to reflect depreciation of the assets and the current rate of comparable assets. Once the cost of tangible assets is determined, your broker will procure a cost for your intangible assets and these two totals combined is the general asking price of your business.
It's not uncommon to find a buyer who only wants some of the assets assigned to your business. And it's likely that they won't agree with some of the pricing assigned to your assets. So when using this method, you will need to have justification for your pricing so that you can ask the highest amount for your business and still be able to walk away with a decent amount after negotiations.