How to Properly Valuate Businesses for Sale

When you’re planning to sell a business or looking at businesses for sale, a detailed business valuation will be crucial. Yet many business sellers and buyers underestimate the importance of valuations, or they misunderstand the valuation process.

So let’s quickly set the record straight.

If you’re selling a business, a valuation has two important functions. 

First, it gives you a sense of how much you’ll get for your business. Without a proper valuation, many business owners have an inaccurate sense of their business’s worth. In these cases, it’s better that owners find this out early — before listing their businesses for sale.

Second, it helps increase the chances of selling your business quickly and at maximum value. Business buyers are much less likely to negotiate pricing than you might expect. If they see a business listed for more than it’s worth, they’ll simply move onto the next listing.

So if your business is overvalued, your listing could stagnate. That extends the time it takes to sell your business. And it can ultimately lower the market value of your business.

If you’re buying a business, the main benefit of valuating businesses for sale should be obvious. When you buy a business, you want to make sure that you’re paying fair value.

But with a proper valuation, you’ll also get a better sense of what returns you can expect from your investment. A professional business valuation will include detailed cash flow projections, giving you a detailed look at how much value the business will generate over the next several years.

Now that we’ve covered the importance of valuating businesses for sale, let’s look at a few different valuation strategies.

How to Valuate Businesses for Sale

If you’re selling or buying a business, there are a few different ways that you can perform a valuation.

Basic Business Valuation Strategies

The simplest strategies used to valuate businesses for sale tend to also be the most common. Examples include:

    • Appraising a business’s assets and liabilities to calculate value
    • Applying a standard multiplier to average annual revenues
    • Applying a standard multiplier to average annual profits

Because of their simplicity, these strategies are popular with independent business sellers and buyers. They’re also common among inexperienced and amateur business brokers.

However, these strategies fail to account for many of the things that actually make a business valuable, particularly after a transfer of ownership. Additionally, they aren’t always an accurate reflection of the market value of businesses for sale.

Professional Business Valuation Services

Given the failings of basic valuation strategies, we strongly recommend hiring a professional business valuation service if you’re selling or buying a business. This should be someone who’s qualified to valuate businesses for sale and who is certified by organizations like the Appraisal Foundation and the Institute of Business Appraisers.

A professional business valuation will consider things like net assets and annual cashflow. But it will also cover a number of additional factors — factors that are much harder to quantify and measure without a valuation specialist.

These include things like the management structure of the business, and whether it’s suitable for operations under new ownership. Many small business owners develop their businesses in a way where, without the owner, the business can no longer operate.

A qualified valuator will know how this impacts the value of a business for a new owner. But this kind of concern will slip by if you apply a basic valuation strategy. And this is only one of the many ways that a valuation specialist can valuate businesses for sale more accurately!

This covers the investment value of a business. But experienced valuators also know how to assess the market value of businesses for sale. 

In some cases, market value may be a different figure from the investment value of a business. Even so, this number will be critical whether you’re selling or buying a business. If you’re selling, you’ll know how much you can reasonably expect to earn from the sale of your business. If you’re buying, it will tell you whether you’re paying a fair rate, based on market indicators.

Selling a business? Looking for businesses for sale? Call Murphy Business today at (888) 561-3243 to connect with a local business broker!

The Advantages of Local Business Brokers

Selling or buying a business is a lot easier with the right broker. If you’re selling, business brokers can help you attract the most qualified buyers, maximize your chances of a completed sale, and recoup full value from your investment. If you’re buying, the right broker can help you find the ideal business for your needs and ensure that you’re paying fair value for your new company.

But this all depends on finding the right broker. And in the vast majority of cases, that means looking for local business brokers — brokers who are based in the same area as the business that’s being bought or sold.

With few exceptions, business sales are inherently local transactions. As illustrated below, it pays to have the experience and expertise of a local broker.

Why Business Brokers Need Local Experience & Expertise

Familiarity with Local Markets

Whether you’re selling or buying a company, it helps to know the local market for business sales. This way, you’ll have a strong sense of going rates for different types of local businesses. You’ll know how long it typically takes to sell a business in your area. And you’ll know where to look for off-market sellers and buyers within the community.

No one has a strong understanding of these factors than qualified local business brokers. An experienced local broker will leverage this expertise to help sellers value and market their businesses accordingly, and to help buyers find the best local business opportunities.

Understanding Regional Appeal

Today, many business buyers aren’t simply looking for a new business to buy. They’re looking for a new community and lifestyle. But as a local business owner, you might not realize what makes your area so appealing to out-of-town and out-of-state buyers.

Local business brokers, on the other hand, know exactly what makes their area appealing to buyers. This includes unique and favorable aspects of the local business climate. And it includes things that make your area a great place to live — particularly for small business owners. This makes it easier for brokers to target the right kinds of buyers and to include regional selling points in marketing materials.

Knowledge of Local Regulations

When you’re selling or buying a business, attention to detail makes all the difference. An ‘i’ left un-dotted or a ‘t’ left un-crossed can lead to major headaches for both parties.

A qualified business broker will understand the importance of these details and will use a systematic process to ensure that nothing gets overlooked. But if a broker isn’t familiar with relevant state, county, or municipal regulations, their process might be insufficient.

Local business brokers work exclusively (or almost exclusively) within a defined area, so they can help you navigate any state, county, or municipal fine print governing the sale or purchase of a business.

Referrals to Area Specialists

Hiring a business broker is a smart move whether you’re selling or buying a business. But a broker isn’t the only specialist you’ll want to hire. At a minimum, you’ll also need a financial advisor and a lawyer or paralegal. And there’s a good chance you’ll need additional specialists, like a business appraiser or valuator.

Hiring the right broker can make finding these specialists much easier. The best local business brokers boast strong referral networks for exactly this reason. When you need a local expert, they’ll know exactly where to point you.

Assistance with Local Financing

Occasionally, a business sale is nothing more than a simple cash transaction. But more often than not, business buyers require third-party financing. And that financing usually needs to come from a local lender.

Experienced business brokers can help buyers acquire financing by referring them to local lenders. In some cases, this occurs through traditional financing. In others, it involves an SBA loan.

Assistance with local financing clearly benefits business buyers. But it also makes life easier for business sellers. By helping buyers acquire financing, local business brokers increase the likelihood of selling your business and can speed up the timeline of your sale.

Connect with qualified local business brokers in your area by calling Murphy Business today at (888) 561-3243!