If selling your business is part of your retirement planning, the reality is that it’s not always the financial win you hope it might be. Yes, you might have spent a lifetime building up trust and reliable customers, but, sometimes, the ‘business’ is more like a job that you’ve created for yourself. Other times, though, businesses can be worth a sizeable sum of money. To see which category your business fits into, it’s important to seek a professional assessment to help you answer the question that could help you retire in style” What is your business worth?
Understanding the worth of your business
Valuing a business isn’t always just about figuring out its sale price. In the case of a relationship breakdown, when the division of financial assets includes everything from superannuation to property, any viable business also becomes part of the financial pool to be examined.
Family lawyers typically engage professional business valuation experts – and their bill alone can typically add $5000 to $15,000 (or more) to your legal expenses, depending on the complexity of the business.
According to business valuation specialists at Pitcher Partners, although many accountants profess to value businesses, “the industry is now increasingly recognised as a specialised service and faces closer scrutiny through regulation”.
Their website promotes their own thorough analysis as critical, with “specific valuation standards, known as APES 225 Valuation Services”, governing quality requirements for valuations “which demand expert skills”.
But if the reason you want to know the worth of your business is to sell it, you will most likely connect with a business broker.
At First Choice Business Brokers, their approach to valuing a business is multifaceted.
One of the biggest problems they see, though, is clients who don’t have a realistic understanding of business worth. For many people, separating the emotional connection to the business and what it means to the life of the person who has created it, is challenging. And being told that a business is not really worth what you thought it might be, can be hard to hear – especially when it was meant to be a significant part of your retirement plan.
Their advice?
“Sellers should be open to all aspects of the business that may affect the sale.”
These may include:
- the conditions of your business
- trends within the specific industry
- location
- business history.
“By evaluating these, this will help you find your potential buyers as it will directly aim at their needs and the price range in which they are willing to pay.”
Choosing a business broker
Think of them as a real estate agent for businesses, including the commission you’ll need to pay them. To make sure you are dealing with someone experienced and professional to look after the sale of what could be a valuable asset, it’s important to do some due diligence.
Ask the business broker for their licence and insurance
Australian business brokers in Australia should be licensed, insured, and a member of industry associations such as the AIBB (Australian Institute of Business Brokers). By checking these documents up-front, you help protect yourself, and can hold them accountable, if anything does go wrong.
Ask the broker for a valuation estimate
A professional broker should be prepared to share an estimated valuation – and their reasons behind it – with you to help you decide if they are the right broker for you, or just trying to win your business.
Like some real estate agents, some business brokers will provide unrealistic valuations to make you think they are going to secure you a large sale price.
To help you choose a business broker who is realistic, look for a valuation estimate that is based on current economic conditions, interest rates and market trends.
Ask about their previous business broking successes
By asking them for their list to sell ratio, you’ll get a clearer sense of their success rate and what they might be able to achieve for your own business.
Ask about their marketing plan
If they can’t share a solid marketing strategy, specific to your business, keep looking. Any successful sale relies on strong, targeted marketing to achieve the best possible results.
Prepare your business for sale
On your end, you’ll need to have through, up-to-date records of all the financials of your business – including any liabilities.
If you have firm contracts with existing clients, this can add value to your business. At the end of the day, what tells the clearest picture about the what your business is worth, is the financial documentation that tracks every aspect of its incomings and outgoings.
Financial statements (for the past five years, if possible) including cash flow statements, debts, annual turnover, and profit and loss statements will all be critical.
Other details around physical assets (stock and equipment), as well as legal documents that show insurance policies and leases, will also be vital.
Different industries often have their own formulas to value a business.
Use the return on investment method to calculate value
If you’re selling your business, the return on investment (ROI) method uses your business’ net profit to work out its value. You can either calculate an ROI based on your hoped-for selling price (value), or a selling price based on an ROI that you set.
To properly value the worth of your business, crunching all the numbers is key, so start by ensuring all your financials are up to date with your accountant, as a starting point.
Commonly accepted valuation methodologies
There are several commonly accepted valuation methodologies used to value equity in a business. The most appropriate method to adopt will be determined based on both the purpose of the valuation and the nature of the assets concerned.
The preferred methods are as follows:
- direct comparison with recent sales of similar assets/businesses
- capitalisation of future maintainable profits/earnings (FME)
- net present value or discounted value of future cashflows (DCF)
- valuation of net tangible assets (NTA)
- ‘rules-of-thumb’ formula applicable to specific industries.
Calculating business goodwill
Goodwill can include:
- brand recognition
- loyal customers
- staff performance
- customer contacts and contracts
- business reputation
- operational procedures.
Working out the value of goodwill can be complicated. It’s another reason that connecting with an experienced business broker is a positive step.
If there’s no money, there are still memories …
Depreciation is another factor to consider – and yet another reason to surround yourself with reliable, financial advice from people you trust to help you do an accurate assessment of what your business is worth. Hopefully, the work you have put in will add up to a meaningful return. But, if it doesn’t, remember the income your business generated for you for the time you worked in it and what it was able to provide. After all, owning a business is not always about the return it might deliver in the end, but the freedom and lifestyle opportunities it provides along the way.
Do you have a business you’ve recently sold? Or are you thinking of leaving your business to your family members? Share your experiences of running a business in the comments section below.
