The second step in an exit strategy is to determine how much your business is worth. There is no set way to accurately value a business; however, I am going to focus on the two methods I use:
1. Market Valuation
2. Third-Party Valuation
Market Valuation
A market valuation answers the question how much have similar businesses sold for? To complete a market valuation, I recast three years tax returns or P&L's and latest balance sheet to determine the market value of the assets, the total annual revenue and the owner benefit (actual cash flow to the business owner before personal uses such as loan interest, depreciation, personal vehicle, vacation, etc.). I then review similar businesses that have sold in the past 10 years and calculate three ratios:
1. Sales Price / Weighted Annual Revenue
2. Sales Price / Weighted Annual Owner Benefit
3. Sales Price / Annual Rent
I use these three ratios to triangulate a selling price. I then factor in the relative market value of the assets to determine if the sales price should be adjusted up or down. This gives me a rough estimate of the Market Price the business should sell for.
Third-Party Valuation
The typical third-party valuation will use a number of standard accounting valuation approaches including asset based methods, income based methods, and market methods to determine the business value. A Certified Business Valuation Analyst will generally use between 7-10 methods to determine the business value. Pricing for a third-party valuation typically starts at about $1,700.
Many business owners take the less expensive approach and request a market valuation. It is important to understand in today's tight financial market, many banks are requiring a third-party valuation as a precondition to approving a loan to support business growth, or to provide a loan to a prospective buyer.
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