Valuing Your Business: How Business Brokers Determine Selling Price

Valuing Your Business: How Business Brokers Determine Selling Price

When you—as a small business owner—decide it is time to sell your business, the next step is perhaps the most crucial of all: determining the value of your business. There are several ways this can be done, but determining a business’ value isn’t an exact science. For that reason, it is essential that you seek out an experienced business broker to help you determine how much your business will sell for.

However, don’t expect that broker to tell you everything you want to hear, as their role is to honestly assess your business and provide you with what they feel is a fair sales price. This is to allow the easiest and most profitable outcome for you. Sometimes, that may mean hearing some hard truths. For instance, you may find that current market conditions mean your business isn’t worth quite what you thought it would. It can happen. After all, the current value of your business may not account for the years of work that you’ve put into it. 

No matter what the value of your business turns out to be, experienced business brokers like the team at Transworld Business Advisors of Utah County can help you find ways to improve your company so that you get the highest possible value when you are ready to sell.

Understanding valuation factors

Understanding some of the basic terminology that is used when valuing a business can help you when you start the process of determining your business’ value.

To start, tangible assets are assets that have a physical substance such as inventory, real estate, vehicles, manufacturing equipment or machinery, and office furniture. On the other hand, intangible assets include patents, copyright, franchises, goodwill, trademarks, and trade names, as well as any form of digital asset such as software, i.e., things that lack physical substance.

Then there are liabilities. These are the things your company owes like payments to suppliers, salaries and wages, payroll taxes and loans. Note that in an asset sale, the purchaser will not assume your liabilities, and they would need to be paid off at the time of the sale.

Financial metrics are also play a role in your business, and include measures of a business’s health and performance such as profitability, revenue, expenses and other financial outcomes.

Finally, business owners need to consider that not all trends are specific to profit. Macroeconomic factors such as inflation or recession and the availability and cost of capital can play a role in how your business will be valued. Even something like the current state of supply and demand plays a part, whether it is for raw materials, the goods you sell, or whether your industry is growing or not.

Common valuation approaches

What are the most common ways that brokers determine the value of your business? Here are the top approaches:

  • Market Approach – this method compares similar businesses in your specific industry and compares sales price against profitability and sales to determine the business value.
  • Income Approach – this method projects the future earnings of your business and calculates the present value of those earnings by applying a discount rate. This method is usually for larger businesses.
  • Asset Approach – this method basically calculates the net asset value of the business, including intangible assets.

Benefits of valuing your business

Even if you aren’t ready to sell, there are many reasons to understand the true value of your company.

  • Helps you plan for retirement and your exit strategy of how to leave your business.
  • Offers insight into how to improve your company & increase its value.
  • Guides you to the best options if you are seeking additional funding.

At Transworld, we have years of experience selling businesses just like yours, and we can provide insight into how to accurately value your business. In fact, we’ve helped business owners sell more than 15,000 businesses, and we have 250-plus offices worldwide with more than 850 brokers. During our 40 years of experience, we have learned that it can take on average nine months to sell your business, but larger deals may require up to a year. In our locally-owned and operated Utah County office, our experienced business advisors have the training and know-how to help ensure you get the best deal. Click HERE to schedule a free consultation today to get started.