When you’re ready to sell your business, you might have already have a figure in mind that sums up what you believe your store or brand is worth. However, putting a dollar value on a pre-existing business isn’t easy. From adding up assets to taking a look at the books, you’ll have to tally up a few different numbers to arrive at a value you and your buyer view as fair. Even if you use a service like First Choice Business Brokers, you’ll need to come up with a number that represents the absolute least you’ll sell for. So how do you start? Do you come up with a per-year figure to present to buyers? Do you factor in sentimental value? Do you tally up all your costs from the first few years of operation? If you’re stumped, don’t worry. Here are a few helpful ways to determine just how much your business is actually worth.
Add Up Your Costs and Labor
Before settling on a number in your head, ask yourself this: How long did it take you to set up your business from scratch? What was your starting figure, and how much seed money do you have? Even though the starting number won’t be the number you ultimately hand over to your buyer, it will help give you a sense of how far you’ve come since opening, and how far the business can be expected to go. If you started with a tiny seed round and have started to turn a profit five years in, that will add value to your business. If you’ve created something that’s self-sustaining, that’s a strong point to argue as well. Once you have a sense of how profitable your business is at the end of each quarter, think about the money you’ve spent in the last year alone simply getting things to a point of seamlessness. How much do you spend on labor, and what kind of equipment have you purchased? Do you own your space or lease it? Since employees and owned property will be part of the inheritance your buyer will be getting, the value of these assets should be considered and factored into your number.
Go with Per Annum Value
One easy way to give your business a cash value is to think about what you make at the end of a year. You can use this figure as a guarantee of things to come, especially if your profits have been increasing by a certain percentage each year. You can also use this number to show that your revenue is solid next to whatever loans and interest you’re paying. Even if you’re not turning a profit yet, using your basic revenue to estimate the future profit of a business is one of the most common ways buyers can put a cash value on a new business. This will also help your buyer put the selling price in terms that are easily understandable. For instance, if your buyer ends up purchasing your business for a number that’s three times your revenue stream, you’ll be selling for “three times sales.”
When selling, it’s important to remember that revenue and profit are not one and the same. Revenue is the entire sum accumulated from sales in a year or a quarter. Profit is that number minus all the incidental costs such as labor, rent, and loans. However, you don’t always need to have profit to make a good sale. Some companies are valued at an extremely high number even though they don’t technically make any profit yet. Buyers are interested in purchasing properties that have the potential to grow and turn a huge profit later on. This means that if your business is cornering a certain market but you still haven’t been able to pay back most of your early loans, you could still be looking at a very high valuation.
Earnings and Multiples
Another good way to protect yourself and get the best out of the deal is to think about your future income. If the business keeps going the way it’s going, how much money would you be making per year? Come up with an estimate for your yearly income five or ten years from now and factor that into your total valuation. Assuming your business continues to profit or even stay stable, that take-home pay is an important piece of what you’re technically selling when you decide to let go of your business. However, since buyers may assume that business won’t be on the rise, they may try to talk you out of a larger sum. Doing your calculations by adding in some sense of the ups and downs of the market will help you reach a more realistic, and ultimately easier, negotiation.