Understanding the Essentials of Business Valuations
When you consult VR Business Sales to sell your business, determining the value is an important and complex priority that needs to be properly executed. There are a variety of elements that must be considered when performing a business valuation; which include actual earnings to calculating discretionary earnings to reviewing profit & loss statements and balance sheets. At VR, we assist in identifying what your business is really worth as that is what is going to attract a qualified buyer, and allow for a maximum selling price.
Analysis Begins with the Business
Valuing a business starts not with its books but by examining its industry to identify trends, development and other important characteristics – otherwise known as risk and value drivers. These create the circumstances that lead to the financial performance. Only after you have carefully analyzed these elements should you then perform a financial analysis, which will be the quantification of identified value drivers economically, by industry and in the marketplace.
Don’t Judge a Book by Its Cover
There’s a misperception that buying a great business is a great investment; however, it can be a bad investment if you pay too much for it. Just because a business maybe struggling doesn’t necessary mean it’s a bad investment if it’s managed carefully and correctly. Looks can be deceiving and it’s important to examine past the front of the business and see if the return on investment justifies the purchase price.
You won’t necessarily find a bargain on a business because most are usually not for sale at the time. Never reject a business that may have a poor performance or one where there’s has been a weak operation or management in place. Where there’s weakness, an opportunity exists, once a correct management is implemented. A well-operated business may be priced too high and provide little room for growth and improvement. VR will assist you in discovering many of the business’ signs of strengths, weaknesses, opportunities and threats.
What is Being Sold?
As the seller, you must accurately define what the buyer will receive in the transaction upon making the purchase. Too often, sellers focus on what they will end up with financially in the deal and buyers will only be concerned with what they have to pay. Instead, spell out in the contract what the buyer will receive in the deal. Each VR Office Is Independently Owned and Operated.
Reading the Market
One area that requires attention in the business valuation is the study of operating multiples such as P/E of businesses in the industry. These multiples reflect both preferences and concerns of investors as well as key value drivers and measures of performance in that industry. This will give you a clearer idea of how some businesses in your industry are achieving high value multiples while others are average or lower.
Standards of Value Vary with Every Business
One thing to recognize is that your business will fit better with one buyer than another due to a variety of factors such as a better mix of product line, customer base, operations, etc. Experienced and well-versed buyers will be able to determine the maximum price they will pay for a business while still creating value. A buyer that pays too much either has a strategy in place for the return on investment later, or hasn’t performed the proper due diligence on the business. Be sure that you are going to attract a type of buyer that will be able to pay what is set as the seller price, while maintaining the business’ value.