If you are thinking about selling your business, then you should start by understanding what makes a business valuable. Having a good idea of what the business value is will help you determine whether or not it’s time to sell. For most businesses, the best time to think about selling is at the beginning or middle of your journey. Not the end.
Working with an accountant can be invaluable in the process. An accountant can help you understand what factors affect valuation and how those factors should be considered when determining if now is the right time to sell.
It’s Important to Know How Much You are Worth
One of the biggest reasons this matters is because of the impact your decisions have on the value of your company. Small financial decisions you make today can have huge impacts 20 years down the road. And that ignores the likelihood something will happen that causes you to decide to sell earlier than expected.
- Such as an offer you don’t think you can refuse.
- An unexpected health issue.
- An opportunity you weren’t expecting.
- Someday you might want to sell your business and move on to do something else.
Here are Some Tips for Determining What Your Business is Worth
When it comes to business valuations, think AIM: asset method, income method or market method.
The three methods are used by different types of investors and lenders. Each has its own benefits and drawbacks.
In a nutshell, the asset approach values your business based on what you have in assets (cash, inventory and receivables). The income method uses your profit as the basis for valuation. Market approach values your business based on how similar businesses are trading in the open market.
How to Increase the Value of Your Business
A great way to increase the value of your business is to increase your profit margin. When a buyer is evaluating your practice, one of the first things they will want to see is your profit margin + “add-backs”. Those add-backs are things like interest, depreciation, and discretionary expenses, like travel, training, car expenses, etc. Then, they’ll multiply the profit + add-backs by a multiplier. The multiplier will vary pretty significantly depending on the size of the business, the current economy, and the location of the business.
The future cash flow projections, your plans for growth, and the expected demand for your goods and services will be on the large list of other things impacting your business value.
Sounds complicated? It is. But we can help with this!
A buyer is going to look at the financial opportunity in buying your business, and they’re not likely to buy for an emotional reason.
You may love your company and value it more than a buyer does. But it’s not worth more simply because you put your heart and soul into it.
When it comes to putting a dollar value on your business, make sure to talk to a professional who can lay out your different options and set a realistic price when it comes time to sell. It helps if they can understand the tax implications as well.
After all, the best time to start the tax planning around selling a business is a few years before you sell it.
Let an Accountant Help
If you’re considering selling your business in the future, let us help you start planning now.
Wasatch CPA Services will provide an initial valuation of your business and make recommendations on how you can grow your business value. We’ll also discuss how to increase your liquidity while protecting your personal assets and help you address any potential tax issues that may arise during a sale.
Book a free consultation today and let’s discuss how we can help you value your business and even help it grow!