How to Value a Business: Considerations for Buyers and Sellers

July 2018

Whether you are buying or selling a small business, knowing what the business is worth is a fundamental requirement. And inevitably, the majority of the issues which are likely to arise during the sale transaction are in some way related to the valuation of the business.

So let’s take a look at the process from the perspectives of both buyer and seller.

Preparing to sell

Business experts believe it takes years rather than months to get a business ready for sale.

It’s never too soon to get the process under way. Preparing your business records, for example, is not just a matter of having all the documentation to hand.

Of course, that’s important, but what a prospective buyer will really want to see is an impressive financial track record alongside reliable projections indicating the company’s future prospects are good.

Selling your small business ‘on the up’ takes a lot of careful planning. For instance, you must be able to convince potential buyers that your company’s business performance does not hinge on your presence.

But don’t underestimate the task of putting a good team in place to achieve this. And likewise, you should never leave sale preparation until just before you retire, or even worse, until something forces you to sell in adverse circumstances.

Getting a sale valuation

It can be hard for a business owner to formulate a realistic assessment of an enterprise which may represent a lifetime’s effort and self-sacrifice.

For example, unique equipment and specialist fixtures and fittings may, in the buyer’s opinion, be an important part of the acquisition for which it would be well worth paying a premium.

Equally, the buyer and his team may be able to demonstrate that modern businesses in your sector perform equally well without such ‘quaint’, but ultimately worthless, details and accessories.

So the lessons here are to compare the market to see what a business much like yours actually sells for, and always look at things through the eyes of a buyer.

Furthermore, as with any sale context, your credibility as a seller is central to the whole process. That means your business valuation must not only be accurate, it must also be convincingly open and honest about every aspect of your business.

A buyer’s valuation

The due diligence process is essentially an opportunity for the buyer to formulate a valuation of their own.

And though it may be informed by common valuation methods used in a particular business sector, it is also heavily influenced by what buyers on average are prepared to pay for similar businesses.

Clearly, no two businesses are exactly the same. A nuanced evaluation of any SME will also consider further aspects, such as the overall aesthetics, fixtures and fittings and other assets which may form part of the deal.

In addition, even though the asking price may compare well with other businesses for sale, are there significant low-spec features which may suggest a lower estimate would be more reasonable? And importantly, does the business come with some outstanding debts which must also be factored into any acceptable final valuation?

Room for negotiation

As deal time approaches, so the seller may signal he is prepared to negotiate an acceptable asking price.

And this is also the point where a buyer may begin to test the water as regards the potential for compromise. Even so, effective haggling must still be based on solid evidence:

As a buyer, if your due diligence should uncover anything which will ultimately devalue the business, then that may allow you to legitimately offer a lower price for the business in return.

And as a seller, if you have valued your business honestly and accurately, then any offers you receive which are well below your asking price should be countered with the reasoning behind your own assessment and supported by appropriate evidence which validates your position.

Whichever valuation technique is used, a business for sale should always be thoroughly prepared in readiness for a sales listing.

Thorough preparation and valuation means buyer and seller can quickly establish a working relationship and thus negotiate a good deal which meets the realistic expectations of both the buyer and seller.

By Jo Thornley, Head of Brand and Partnerships at Dynamis. Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.com, FranchiseSales.com and PropertySales.com and likeminded companies.

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