The valuation of your business is arguably the most important step you’ll take when selling it.
If you value your business too low, you could be walking away from your most prized asset with hundreds of thousands of dollars left on the table. No matter what your plans are following the sale, it’s going to take a fair amount of time to earn that.
On the other hand, if you overvalue your business, you could scare off the potential buyer who would have been perfect for the future of your clients and employees. Such buyers could often have paid good money for the right investment, if only they hadn’t been completely put off negotiating a deal.
There are many different methods of valuing a business and it’ll be tempting to use the one that best suits your personal agenda. That’s your prerogative. Below, we explain a basic rule of thumb for setting an asking price for your business.
Assets, Profit Margins, and Multipliers
The most important figures that potential buyers will be interested in are your assets, revenue, and profit margins.
A common formula used to create an asking price would be : (Annual profits x 'multiplier') + assets.
With this valuation model, the multiplier will the main point of negotiation. The multiplier is typically based on how sustainable the buyer believes your business model is.
So, if the departing owner’s assets are split across a large number of clients and they spend a large portion of their time recruiting even more business, that's going to work in their favor. If they work with standardized portfolios and have invested time into training young staff to become partners, these are also signs of a sustainable business.
It's common for businesses without any of these advantages to request a multiplier of four or five times the annual profits on top of their assets, but it's not uncommon for those with the most sustainable models to ask for, and receive, double that.
Once a selling price has been agreed with the buyer, their legal team will begin a lengthy due diligence process to ensure that the assets and annual profits add up to what the departing owner suggested.
To avoid a stumbling block at this point of negotiations, it’s worth getting your books in order so it’s easy for their team to make an accurate valuation of your company.
How Succession Link can help you find the right buyer
If you’re communicating with several interested buyers, it would be foolish to only consider the offer on the table. A better strategy would be to also think about which individual is likely to help you complete a smooth sale and a smooth transition that keeps your clients and employees happy.
Succession Link provides an online platform that makes it easy for business owners to find the perfect successor for their business. Our database is filled with experienced professionals looking to acquire or merge with new practices. Click the link to learn more about how Succession Link allows you to easily connect with these professionals and strike a deal.