Put simply, “valuation” is what a buyer is willing to pay for your business. In practice, however, valuation is anything but simple and is often as much art as science. Here is a little bit of “Valuation 101”:

Valuation is not formulaic

• The initial step to selling a business involves a thorough and accurate business assessment which includes a valuation analysis.

• Common methods for valuing a business include public market comparable analysis, identifying precedent M&A transactions, discounted cash flow analysis, book or asset based valuation approaches and applying multiples to revenue, EBITDA or net income.

• Many formulas and “rules of thumb” have been developed to arrive at a “ballpark” estimation of value, but it takes seasoned expertise to look beyond mere formulas and determine a real measure of value.

Textbook formulas and “rules of thumb” alone are not adequate methods for valuing a business

Don’t leave money on the table by neglecting the intangible value of a business

• At a minimum, a buyer ought to be willing to pay the baseline intrinsic value of a business.

• In many cases, however, sellers forego the opportunity to obtain appropriate compensation for the intangible value of the business. This is caused by the inability of inexperienced sellers to properly substantiate, support and quantify the intangible value of their business.

• Employing proper valuation methodologies and techniques can help sellers maximize value. It is also important to recast historical financial statements in order to show the effect the purchase of the business will have on the buyer’s financial results.

Premium buyers analyze the future potential of an acquisition to determine value.

The intangible value of a business is worth a significant amount to the premium buyer.

How can the value of a business be increased?

• Prepare concise, detailed and comprehensive information regarding the business.

• Apply sound market analysis and research to support financial projections.

• Define the intangible and future benefits of the business and the potential synergies of a pro forma combination.

• Identify and approach the right buyers.

• Conduct a structured, competitive sales process.

• Structure and negotiate a deal on the seller’s terms.

By using sound market research, approaching the right buyers, running a competitive process and effectively structuring the deal, a business owner can maximize value when selling the company.

http://www.TotalBusiness.com is a Website that provides business owners with the information they need in order to successfully start, manage, grow, and sell their businesses.

The site features over 3,000 articles and 60 guides on business topics such as starting a business, financing a business, sales and marketing, building a website, setting up an office, hiring employees, and selling a business. The site also contains articles on legal and accounting issues affecting businesses and allows business owners and entrepreneurs to get free expert advice from local lawyers or accountants. The site contains over 1,000 business forms and agreements that are helpful to business owners and provides a business directory with over 1,700 merchants who provide services specifically for small businesses.

Eran Salu, JD,MBA,CPA is the Founder and CEO of TotalBusiness.com

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