You’ve made the decision to sell your northeast Ohio business and use the proceeds to help finance your retirement or your next business venture. But how do you determine exactly how much it’s worth? We are here to help you with your business valuation. Even with the shadow of the pandemic looming over the world’s economy, 2021 saw $2.9 trillion in M&A transactions in the United States, up 55 percent from 2020, according to research from KPMG. This year is no different as M&A advisors in the Cleveland market predict robust activity.
What Is a Business Valuation?
Conducting a business valuation is an excellent opportunity to assess the financial health and potential of your business, or of a business you’re hoping to buy. Along with doing financial legwork, valuing your business also requires you to exercise control over any emotions. Particularly if this is your first company, or if you run a family-owned and operated business, take care to approach valuation as objectively as possible to come to an accurate number.
Doing a business valuation isn’t an effortless process. Business owners should enlist the services of their accountant or experienced financial advisor to help. The process will include a deep dive into your company and personal financials. Both seller and buyer will have to organize their financial records — a crucial step to secure accurate calculations. And beyond conducting your valuation, you’ll need your finances to transfer business ownership. Sellers will need to have the following documentation to ensure a smooth valuation process:
- Licenses, deeds and any proprietary documents.
- Profit and loss statements for the last three years.
- Tax filings and returns.
- Brief overview of your business or personal finances.
Determining Your Business’ Value
Knowing what your business is worth is critical to secure the most advantageous price in today’s active M&A market. With the help of your accountant or financial advisor, there are several ways to determine the market value of your business.
- Count the Value of Assets. Add up the value of everything the business owns, including all equipment and inventory. Subtract any debts or liabilities. The value of the business’s balance sheet is at least a starting point for determining the business’s worth. But the business is worth a lot more than its net assets. How much revenue and earnings can you expect?
- Base it on Revenue. How much does the business generate in annual sales? Calculate that and determine, through a stockbroker or a business broker, how much a typical business in your industry might be worth for a certain level of sales. For example, it might typically be about two times sales.
- Use Earnings Multiples. A more relevant measure is a multiple of the company’s earnings, or the price-to-earnings (P/E) ratio. Estimate the earnings of the company for the next few years. If a typical P/E ratio is 15 and the projected earnings are $200,000 a year, the business would be worth $3 million.
- Go Beyond Financial Formulas. Don’t just base your assessment of the business’s value on number crunching. Consider the value of your business based on its geographical location. In addition, consider its potential strategic value to a would-be acquirer if there are business synergies.
Manning & Clair Solutions
Manning & Clair Attorneys At Law have extensive experience in providing Cleveland-area businesses of all sizes expert legal counsel when it comes to buying or selling a business. We have the experience and knowledge to help you effectively run your business.
Manning & Clair Note: The information shared here is intended for a general overview and discussion of the subject. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. Please consult an attorney for advice about your individual situation.