Time to Cash Out?
After a long period of malaise, the small-business market heated up over the last couple of years. In fact, during the second quarter of 2014, the number of closed sales returned to pre-recession levels.1
This is good news for business owners who have been waiting and hoping for a healthier market to sell their businesses, especially those who have a large chunk of their personal wealth at stake.
One survey found that two-thirds of small-business owners intend to retire in the next 10 years.2 If you are one of them, you might keep a close eye on the value of your business.
How Much Is It Worth?
Lenders generally require a professional valuation before extending credit to interested buyers. An accountant or business appraiser may employ one or more of the following methods, depending on the nature of the business and other relevant factors.
Asset-based approach. (Also known as cost approach.) Considers the fair market value of fixed assets and equipment and the wholesale value of current inventory, minus any liabilities.
Market approach. Compares the business to similar enterprises that have sold recently, adjusting for differences in size, risk, market position, and other characteristics.
Income approach. Calculates a value based on the company’s ability to earn income. Basically, the average earnings over a certain period of time are divided by a capitalization rate that typically applies to the specific industry. The value is often expressed as a multiple of net income or revenue.
An element of subjectivity means a seller and a potential buyer could draw very different conclusions when assessing a firm’s value, so competing figures might become the starting point for negotiations. To help sell your business at a better price, spend some time cleaning up the books and the facilities.
Because it could take many months to find a qualified buyer and finalize the transaction, it might be wise to begin researching the market and planning for a potential sale long before you intend to retire from your business.